A host of new high-level economic data released late last week and on June 15 previews potentially sluggish 2020-Q2 GDP data, probably to be released in early-July, after GDP declined by 6.8 percent (year over year) in Q1:

• Industrial production in May increased by 4.4 percent from a year earlier, an acceleration from 3.9 percent in April.
• Fixed asset investment was down by 6.3 percent, an improvement from a 10.3 percent decline in April.
• Retail sales were down by 2.8 percent from May 2019, less than the 7.5 percent fall in April.
• Home prices rose at the highest rate in three months.
• Unemployment fell slightly with the surveyed rate of urban unemployment down to 5.9 percent in May from 6.0 percent in April.
• Consumer price inflation is easing, with the price level up by 2.4 percent in May after a 3.3 percent increase in April.
• Producer price inflation is negative, falling by 3.7 percent in May, an acceleration from -3.1 percent in April.
• Net exports were positive, as declining imports (-16.7 percent in dollar terms) outpaced a fall in exports (-3.3 percent in dollar terms, a slight improvement from April's decline of 3.5 percent).

Even seeming bright spots in the data, however, are subject to qualification and further scrutiny, suggesting a darker picture that may miss broad swaths of the Chinese economy critical to employment and growth:

• Although industrial recovery is up, the survey data on which it's based does not include production by small- and medium-size enterprises (SMEs) and only includes enterprises with principal business revenues greater than 20 million yuan (about $2.8 million).
• Similarly, for retail sales only outlets with principal sales of 5 million yuan or more (about $715,000) are included.
• Accordingly, many family-owned businesses and sole proprietorships are excluded from the latest data even though SMEs account for about 60 percent of GDP and 80 percent of employment, according to official data.
• Unemployment data are incomplete and reflect only surveys of urban workers. The number of people looking for work is undercounted, with migrants returning home due to loss of urban jobs not included.

Moreover, consumer price index disinflation, which has been on a declining trend since January, and producer price index deflation together reflect lagging domestic demand. Changes in PPI also strongly correlate with industrial profits, which are almost certainly down. The inflation trends reinforce the decline in retail sales, as does the fall in imports.

Declining investment will affect growth beyond the current quarter. Investment is slackening at a decreasing rate, yet much of the improvement is due to public sector infrastructure investment. Private sector investment is still negative and declining corporate profits will hold it back further. China still could achieve slightly positive growth for 2020, but will require no recurrence of the virus and stronger recovery in Q3 and Q4. Regardless, China will not be able to avoid its worst yearly growth result in four decades. Projections of 2020 growth range from -1.5 percent to an optimistic increase of about 1 percent.
 
Much remains unknown, but the prospect of further outbreaks may dampen key domestic consumer spending, which is ultimately the lynchpin of China's economic recovery, especially given a decline in demand from Western markets. This past week, however, has seen Beijing roiled by a new cluster of COVID-19 infections linked to the Xinfadi wholesale seafood market, which also spread infections to Liaoning and Hebei provinces. With consumption already dampened by public fears of a new wave of the virus, the Beijing infections will likely intensify this hesitation, while potentially heralding further similar clusters across the country and subsequent lockdowns.
 
China is the first country to reopen its economy, and the rest of the world is closely watching its ability to cope. Economic recovery was a priority of the National People's Congress in May, which also dropped China's unrealistic growth target rate. The target was a throwback to central planning; dropping it reduces incentives, especially for provinces, to try to achieve artificial and unsustainable levels of growth.
 
Still, with households and SMEs bearing a disproportionate share of the shock from COVID-19, there will be setbacks to economic rebalancing and deleveraging over the longer-term. Those agents are the most productive in the economy and the focus of economic reform, so their difficulties will sap growth drivers.