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China’s economic activity in April adds to recession fears

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Yahoo Finance's Akiko Fujita and Brian Cheung discuss the sharp decline in Chinese economic activity in April amid the country's COVID lockdowns and how it may have ripple effects throughout global economies.

Video Transcript

[MUSIC PLAYING]

AKIKO FUJITA: Welcome to "Yahoo Finance Live," and happy Monday to all of you. I'm Akiko Fujita.

BRIAN CHEUNG: And I'm Brian Cheung. It is Monday indeed-- unfortunate news on that front. But the good news is you get to hang with us for the next hour. 11:00 AM on the East Coast here-- let's take a look at markets so far as we are an hour and a half into the trading session

Dow Jones down half of a percent, the S&P 500 up 8/10 of a percent, and the NASDAQ down 1.4%, so red across the board, although, of course, after those 3% to 4% down days last week, we'll take, I guess, whatever we can get. On the bond yield front, we've actually seen some interesting movement in the US 10-year with the yield actually going down to about 2.88%. That's down about 6 basis points. Keep in mind that the 10-year yield was above 300 basis points only a few weeks ago, so some interesting movement on that front.

But, of course, Akiko, we're watching a number of different types of economic prints coming from abroad, also paying attention to the world's second-largest economy in China, where you saw economic data across the board really looking quite ugly.

AKIKO FUJITA: Well, and we're seeing that weigh on investor sentiment in the session right now. We saw industrial output as well as consumer spending fall to the lowest level since the pandemic began. Retail sales were down 11%, industrial production down nearly 3%.

And, Brian, a lot of this is, of course, because of those COVID lockdowns that we have seen over in China. By the way, unemployment rate fell to 6.1%, that also raising alarm for those who are watching very closely how significant the second-largest economy is.

BRIAN CHEUNG: Yeah, certainly. And, you know, when you talk about all of these factors and readings on industrial production and on unemployment and on economic activity, it's no surprise because of the shutdowns that we saw. So the next natural question is, is the worst already past China?

And what we know is that at least in the city of Shanghai, where we've seen a lot of those factory closures, it's disrupted effectively a lot of global supply chains, the city said yesterday they would start to allow restaurants to reopen. They said gradually, hopefully by the middle of June, maybe something in Shanghai would look a little bit closer to normal life.

Now, of course, you can't underappreciate just the social impact of the lockdowns that have been happening in China, which here in the United States, you kind of don't realize. It's been many months that people have been stuck inside their apartments, unable to go outside-- social media in China very good at kind of censoring any sort of protest that people have been doing digitally to kind of call out the government for how stringent these measures have been.

But at the same time, is that gonna corrode kind of the attitudes and the expectations for an economy that's essentially been pushing 6% to 10% GDP growth for effectively the last decade? What is that gonna do over the medium term?

AKIKO FUJITA: Well, and you have to wonder how Xi Jinping manages the messaging. If you look back to what was announced several weeks ago, he came out and said that there would be significant infrastructure investments to be able to stimulate the economy. And a lot of people saw that and said, huh, that sounds very similar to what happened in 2008 post-financial crisis-- obviously not on that level. But that's another sign that China is seeing that slowdown.

And this is an interesting chart that we got from the Atlantic Council-- Josh Lipsky's team over there, shoutout. You see right here why we're watching the Chinese economy so closely. And you see the past cycles. Recessions that we have seen in the past, China outspent the US and outgrew the US significantly. And if you look over at where 2023 are-- and this is, of course, still estimates-- it shows just how much that growth has slowed down.

So any kind of slowdown we see in China is certainly going to have an effect globally, not just here in the US-- by the way, Bloomberg estimating that China's GDP contracted for the first time since February of 2020 in April. You're talking about 0.7%.

BRIAN CHEUNG: Yeah, and we have to remember that these types of things that are happening in China are absolutely going to have/already are having ripple effects on the US economy as well. I mean, you saw that Goldman note over the weekend where the economists there downgraded expectations for US growth in the second quarter of this year to 2.5% on an annualized basis-- quarterly annualized basis.

But they were saying a lot of that is because of the drag that comes from a larger inflationary impact of supply chain disruptions in China. And we're already seeing kind of signs of recession worries here in the United States where, obviously, the yield curve inversion not long ago earlier in the spring. But you also take a look at just measures that we got this morning from the New York Fed Manufacturing Survey, showing a lot of economic activity, at least in the Northeast region, showing contraction. It came in at minus 11.6. It was a positive 24.6 in April.

So, again, for people that don't normally read this type of index, you might not be knowing what this is worth. But just if you think about this within the context of it's a measure of what manufacturing activity looks like, this is already having an impact. And I think that that's something that's very interesting as part of this overall globalization China growth story in the next few quarters.

AKIKO FUJITA: Yeah, it's just another reminder of how interconnected everything is.