As much as China’s latest economic data indicate a slowdown in growth, a look at seasonal factors — and air pollution levels — signals the deceleration could be more significant, analysts said.

Data released Thursday showed China’s industrial output fell from 5.7 percent in December to 5.3 percent in January and February. That was the slowest pace in 17 years, according to Reuters. Fixed-asset investment rose 6.1 percent and retail sales increased 8.2 percent, both mildly beating the expectations of analysts polled by Reuters.

Economic reports for the year’s first two months are often lumped together in China to account for the Lunar New Year holiday, which typically takes place in early February. As people visit family and friends, the nationwide business shutdown can dampen economic activity.

This year, there may be other factors at play.

“Due to the anti-pollution campaign in November 2017 and March 2018, activity data in January-February this year may have been inflated due (to) a low base,” Ting Lu, chief China economist at Nomura, and his team said in a Thursday report.

The Chinese government is in the middle of a multi-year effort to reduce air pollution, which has enveloped major cities in unhealthy smog, especially during the winter months. However, cutting the amount of hazardous particles in the air requires less reliance on coal-burning factories, which could have a negative impact on economic growth in the short term.

Anecdotally, in the southeastern part of China around Shanghai and Hangzhou, skies have been gloomy for much of the beginning of the year.

“The Chinese government is seriously concerned about unemployment (first and foremost) and GDP growth,“ Junheng Li, founder of China-focused equity research firm JL Warren Capital, said in a note on Jan. 19. “We have witnessed first-hand that many factories that had shut down previously have now been reopened in the greater Shanghai metropolis, producing severe smog in the city almost daily — far worse than last year.”

In the north, Reuters analysis also found that “only six of 39 smog-prone northern Chinese cities have managed to cut concentrations of hazardous airborne particles known as PM2.5 during the latest winter anti-smog campaign beginning last October.” The report said average concentrations of PM2.5 rose 13 percent over the period, and cited a government official last week as saying that, while weather was partly a factor, some localities wanted “a rest after years of hardship.”

Slower growth ahead

The Chinese government has indicated it remains intent on cutting back pollution. Premier Li Keqiang said last week in his annual government work report that authorities will strengthen pollution prevention and control in the year ahead.

At the same time, Li gave a lower economic growth target than last year, and said the country must be “fully prepared for a tough struggle.”

The economic outlook doesn’t bode well. Nomura’s Lu noted that pent-up demand in April and May of last year likely means the comparable year-on-year data on economic activity in the months ahead will be “negatively affected.” Lu lowered his first-quarter gross domestic growth forecast to 6.2 percent growth from the year-ago period, and maintained a forecast of an even slower 5.7 percent growth rate for the second quarter.

China’s economy grew at 6.6 percent last year, according to official government data, which represented the slowest pace since 1990. Beijing says it is aiming for 6 to 6.5 percent growth this year.

Analysts also pointed out that Thursday’s data release indicated the majority of fixed-asset investment came from property, while spending growth in areas more critical to the economy was less robust:

  • Manufacturing investment dropped to a 5.9 percent growth rate in January and February, down from 11.6 percent in the fourth quarter.
  • Infrastructure investment grew 2.5 percent, down from a 5.7 percent rate in the three months prior.

“(Thursday’s) data is the third wake-up call to the market in six days, after exports data last Friday and credit data on Sunday,” Larry Hu, head of China economics at Macquarie, said Thursday in a report. “All of them point to strong growth headwinds ahead, which lays the ground for a choppy market like 2012 (earnings downward revision and multiple upward revision, left charts) instead of a bull market like 2017 (both earnings and multiple being revised up).”

One of the few bright spots may be stabilization in retail sales, which Hu said he expects should grow at 8 percent this year, slightly below last year’s 9 percent growth.

The Shanghai composite fell 1.2 percent Thursday, and it’s down more than 3.5 percent over the last five trading days. Still, the index is up 19.9 percent for the year so far.