China’s economy is growing again. That’s good news for the rest of the world

China’s economy is growing again after its worst three-month period in decades. While that could bode well for the global post-coronavirus recovery, the data suggests that people are still nervous about leaving their homes and spending money.

The world’s second largest economy grew 3.2% in the April-to-June period compared to a year ago, according to government statistics released on Thursday. That’s better than the 2.5% growth that analysts polled by Refinitiv were expecting.

It also means that China averted recession. In the first quarter, the $14 trillion economy shrank 6.8%, the worst plunge for a single quarter on record since China started publishing those figures in 1992. That was also the first time China reported an economic contraction since 1976.

The rebound had been widely expected. China — the early epicenter of the outbreak and the first in the world to impose draconian measures to quell the virus — was the first major economy to reopen. Now it’s the first to emerge from the record downturn.

The early return to growth for China could foreshadow good news for the rest of the world.

The International Monetary Fund said in June that the global economy could contract 4.9% in 2020, lower than its April forecast. The IMF at the time projected the recovery to happen more gradually than previously expected.

But “the downturn could be less severe than forecast if economic normalization proceeds faster than currently expected in areas that have reopened,” the organization said. It projected that China’s economy will grow 1% this year, while the United States and Europe will see sharp contractions.

An uneven recovery

While the magnitude of the recovery in China was stronger than many analysts expected, it was also “highly uneven,” according to Larry Hu, chief China economist for Macquarie Group. He noted that supply was stronger than demand, for example.

Industrial output was a bright spot, growing 4.8% in June — its fastest pace this year, according to Refinitiv data. Manufacturing in high tech sectors was particularly solid. Overall investment alsofared better than expected.

Retail sales, though, were a weak link, falling 1.8% in June compared to the prior year. Analysts polled by Refinitiv were expecting a return to growth.

The weakness in retail suggests that it’s still proving tough for Beijing to convince people to spend money again, even as the government tries to spur consumption. For example, authorities earlier this year began handing out cash to prospective car buyers, along with billions of dollars in coupons to encourage people to buy goods and services, including smartphones and tourism activities.

People “will not leave their apartment and go on a spending spree until they feel confident the landscape is virus-free,” wrote Stephen Innes, chief global markets strategist at AxiCorp, in a research note.

Beijing has admitted that motivating people to spend money remains a challenge, particularly since China is still trying to keep the coronavirus pandemic under control.

The government needs to “try even harder” in the second half of the year to help grow spending power among individuals, said Liu Aihua, a spokeswoman for the National Bureau of Statistics, at a press conference in Beijing on Thursday.

Markets in mainland China struggled after the economic data was published. The benchmark Shanghai Composite (SHCOMP) — which just last week stormed into a bull market — closed down 4.5%, wiping out almost all the gains for the past two week. But it still remains in bull territory, up 20% from its recent low in March.

Challenges ahead

China’s recovery suggests that its economy remains on pace to grow this year, despite the first quarter’s significant downturn. Oxford Economics predicts the economy will grow 6% in the second half of the yearand by asmuch as 2.5% for all of 2020, “supported by improved sentiment after the successful containment of Covid-19 and significant fiscal and monetary policy easing.”

But there are challenges ahead.

“The darkest moment is behind us, but given the huge uncertainties fromCovid-19 and the global economy, it’s too early to say that China is out of the woods,” Hu from Macquarie said.

Economists at Nomura said China continues to face other problems, including the worst flooding in decades and escalating tensions with the United States. There’s also the continued risk of another wave of coronavirus.

“The Chinese economy, together with the global economy, could be severely hit again if a second wave of the pandemic [breaks] out in the winter,” the Nomura economists wrote in a research note.