China Suffers Historic Economic Slump With Hard Recovery Ahead
Gross domestic product shrank 6.8% in the first quarter from a year ago, the worst performance since at least 1992.
(Bloomberg) -- The coronavirus pushed China’s economy into its first contraction in decades in the first quarter, with the spread of the disease around the world now leaving the nation reliant on fragile local demand to spur a recovery.
Gross domestic product shrank 6.8% from a year ago, the worst performance since at least 1992 when official releases of quarterly GDP started and missing the median forecast of a 6% drop. The economy hasn’t contracted on a full-year basis since the end of the Mao era in the 1970s.
Hours after the report, the country’s leaders pledged to deliver more stimulus including interest rate cuts to boost domestic demand, China Central Television reported Friday evening after a meeting chaired by President Xi Jinping. Authorities will keep liquidity “reasonably ample” by cutting the amount of reserves banks need to hold, the report said, without providing details.
“The first quarter of this year was very unusual,” CCTV reported, citing remarks made during the Politburo meeting. “The sudden Covid-19 outbreak had an unprecedented impact on China’s economic and social development.”
Both retailing and factory output showed improvement from the nadir in the first two months, suggesting a stabilization in economic activity. But the data overall indicated an uphill struggle awaits the world’s second largest economy and its experience will be monitored elsewhere for clues as to how fast other economies will emerge from lockdowns.
“We expect this recovery to continue,” said Louis Kuijs, head of Asia economics at Oxford Economics Hong Kong Ltd. “However, the upturn will be slowed down by lingering consumption weakness and sliding foreign demand.”
Other indicators showed retail sales sliding 15.8% in March as consumers remained wary, while investment decreased 16.1% in the first three months of the year. A brighter sign was the smaller-than-expected contraction in March industrial production of 1.1% as factories returned to work amid easing lockdowns.
China’s markets held on to gains and ended slightly higher as investors had already anticipated the weak data. The Shanghai Composite Index added 0.7%, while the Hang Seng Index climbed 1.6% in Hong Kong.
The economy was forced into a paralysis in late January as the epidemic that first started in Wuhan spread across the country. The economy remained shuttered for much of February with factories and shops closed and workers stranded at home. The process of resuming business has been slow and the return rate only inched up to around 90% at the end of March, Bloomberg Economics estimates.
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To cushion the economic blow, China has unveiled a range of support measures and has increased fiscal and monetary support -- although not on the scale of other nations.
What Bloomberg’s Economists Say...
“The March activity data suggest the recovery will be a long haul -- especially with the pandemic clobbering external demand. A much narrower decline in production points to strong improvement on the supply side, as our back-to-work gauges have flagged. This partly explains the limited drop in GDP, which is production based. But foundering retail sales and investment underline continued weaknesses on the demand side.”
--Chang Shu. Bloomberg terminal clients can read the full report HERE
While exports fell less than expected in March as production capacity was gradually restored, economists warn headwinds lie ahead as the rest of the world shuts down and external demand diminishes.
“Most major economies are still in the lockdown stage,” Robin Xing chief China economist at Morgan Stanley Asia, said on Bloomberg TV. “As a result, growth in the second quarter will be shallow, just marginally above zero.”
On the positive side, the surveyed jobless rate actually declined in March, to 5.9% from February’s record 6.2%. That suggests China is so far avoiding the kind of job destruction seen in the U.S., where more than 5 million Americans filed for unemployment benefits last week.
Consumers Key
Much depends now on whether consumers regain a willingness to spend amid nervousness that the virus can stage a comeback as controls are relaxed. Evidence from the epicenter of the virus, Wuhan, suggests progress will be slow.
While factories around Wuhan are working around the clock to get back up to speed, the recovery of consumer-focused businesses won’t be straightforward. People are cautiously taking to the streets again, but they remain subject to curbs on their movements aimed at keeping the virus at bay.
The nation’s per capita disposable income declined by 3.9% in real terms in the first quarter from a year ago, the first contraction since the data was available in 2014.
Consumer caution “continues to restrain demand, and thus activity more broadly,” said Frederic Neumann, co-head of Asia economic research at HSBC Holdings Plc in Hong Kong. “This is reminder also for other economies of the arduous path to full recovery even after full lockdowns are removed. All this points to the need for a more determined policy push on both the monetary and fiscal fronts to ‘shock the system’ and get activity back up to its earlier vitality.”
©2020 Bloomberg L.P.
With assistance from Bloomberg