It would probably be hard to find a clearer example of what economists describe as a “V-shaped recovery” as the figures China released on Thursday.

China’s economy beat most analyst expectations and posted a rapid rebound in the second quarter as coronavirus lockdowns were eased, allowing factories, shops and restaurants to resume operations.

But continuing weakness in retail sales and investment, coupled with surging numbers of cases in one of China’s main export markets – the United States – and rising political tensions with Washington, mean Beijing’s path back to a tangible economic recovery for the majority of the country’s people could be a bumpy one.

China’s gross domestic product (GDP), the most commonly used measure of economic performance, expanded by 3.2 percent in the April-June period compared with the corresponding quarter last year. That was faster than the 2.5 percent average growth forecast in a poll of economists by Reuters news agency, according to data provider Refinitiv. A Bloomberg poll had predicted a growth rate of 2.4 percent.

The latest figure follows a historic 6.8 percent year-on-year plunge in the first three months of 2020. That was China’s first economic contraction since at least 1992, when it began publishing quarterly GDP data.

“The national economy overcame the adverse impact of the epidemic in the first half gradually and demonstrated a momentum of restorative growth and gradual recovery, further manifesting its development resilience and vitality,” China’s National Bureau of Statistics said in a statement accompanying the figures.

‘Mounting external risks’

But it added a note of caution.

“However, we should also be aware that some indicators are still in decline and the losses caused by the epidemic need to be recovered. Given the continuous spread of the epidemic globally, the evolving huge impact of the epidemic on the global economy and the noticeably mounting external risks and challenges, the national economic recovery was still under pressure,” the agency said.

Those declining indicators included retail sales, which fell by 1.8 percent in June compared with the same month last year, the fifth straight month of contraction and a worse performance than analyst projections of a mild recovery.

Fixed asset investment – the amount of money organisations spend on machinery, buildings, land or new technology, and which includes government infrastructure spending – fell by 3.1 percent year-on-year in the first half of 2020.

But many economists say the overall picture for China’s economy is brightening.

“The Q2 [second quarter] GDP outturn was very positive, showing that China’s economy has rebounded robustly from the severe impact of the pandemic in Q1 [first quarter] 2020. The manufacturing sector is now growing at a strong pace, with industrial output rising by 4.8% y/y [year-on-year] in June,” Rajiv Biswas, chief economist for the Asia Pacific region at research firm IHS Markit, told Al Jazeera.

“China is leading the global economic recovery from the pandemic, although the EU and US also showed a significant rebound in manufacturing and services output in June, according to the latest PMI surveys,” he added.

Analysts noted that even though retail sales posted another drop in June, the pace of declines appears to be slowing from a 16.2 percent contraction in March.

Employment improvement

Another source of optimism that domestic consumption could rebound in the coming months was an improvement in the unemployment data.

China’s urban unemployment rate has recovered to nearly pre-coronavirus levels but many people remain reluctant to boost spending, analysts say [File: Thomas Peter/Reuters]

The urban unemployment rate fell to 5.7 percent in June, compared with 5.9 percent a month earlier.

Research firm Capital Economics says the latest figure means the government’s headline unemployment rate is just half of one percentage point higher than its level at the end of last year.

“More importantly, migrant workers, who are not properly captured in the surveyed rate yet make up a third of the urban workforce, have mostly resumed employment with the number working in urban areas less than 3 percent below pre-virus levels at the end of [the second quarter] compared with the 30 percent year-on-year decline at the end of February,” Capital Economics’ senior China economist Julian Evans-Pritchard said in a note sent to Al Jazeera.

But others were not quite as optimistic.

Banking giant HSBC said much of the growth in economic activity was a result of higher exports, mainly due to shipments of medical products and electronics such as laptops. Meanwhile, imports have been shrinking, especially in April and May, reinforcing the argument that domestic demand for goods and services remains weak.

And other factors are also likely keeping a lid on China’s economic performance, including a build-up of unsold goods or components in factories, together classified as inventory.

“We think high inventory pressure, weak profit growth and continued uncertainties over COVID-19 and US-China tensions are the main factors dampening the willingness of private sector businesses to expand investment,” Jingyang Chen, Greater China economist at HSBC, said in a note sent to Al Jazeera.

‘Vanished into thin air’

And with many parts of the world experiencing a resurgence in coronavirus cases, exports alone are unlikely to be able to sustain China’s growth over the rest of the year, some analysts say.

“Once again, China will have to rely on its own devices to keep growth up … The growth driver for [the second half of 2020] is unlikely to be external,” said Daiwa Capital Markets economists Kevin Lai and Eileen Lin.

High-water mark? Worsening political relations between the US and China could threaten the phase-one trade deal the two signed earlier this year, say Daiwa Capital Markets analysts [File: Evan Vucci/AP]

In addition to the ongoing pandemic, Beijing’s worsening relations with Washington could threaten a phase-one trade deal signed between the two in January, and dampen China’s recovery, analysts say.

“Further trade talks have stalled completely. There is a risk that both sides will ditch the phase one deal, as tensions have expanded to include disputes over areas such as the pandemic, South China Sea, Hong Kong, Taiwan and Iran,” the Daiwa analysts said in a research note sent to Al Jazeera.

A new security law imposed on Hong Kong by Beijing has resulted in US President Donald Trump revoking Hong Kong’s special trading status in a retaliatory move against the Chinese government.

Meanwhile, one of China’s most important technology companies, telecommunications equipment giant Huawei, is being shut out of key markets in the US and, most recently, the United Kingdom, as they roll out their next-generation 5G mobile networks. Other US allies may be forced to follow suit. 

National Security Council spokesman John Ullyot said on Wednesday that Trump has not ruled out further sanctions against top Chinese officials, including Hong Kong Chief Executive Carrie Lam, in response to their handling of the political unrest in the semi-autonomous territory

The Hong Kong Autonomy Act, which Trump signed on Tuesday, allows him to impose sanctions and visa restrictions on Chinese officials and financial institutions involved in the imposition of China’s new national security law in Hong Kong.

“The atmosphere for both sides to take stock of what was written under Phase One and to look at what should be on the agenda for Phase Two has vanished into thin air, in our view,” Daiwa’s analysts added.

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