The latest data point to a 20% q/q contraction in GDP this quarter (-16% y/y), even on the official figures. Given the shock to incomes and employment, the continued concern about the threat of further infections within China, and the growing disruption from efforts to contain the virus overseas, recovery will take several quarters, even with stimulus providing a tailwind.
- The latest data point to a 20% q/q contraction in GDP this quarter (-16% y/y), even on the official figures. Given the shock to incomes and employment, the continued concern about the threat of further infections within China, and the growing disruption from efforts to contain the virus overseas, recovery will take several quarters, even with stimulus providing a tailwind.
- It has been clear for some time that China has experienced an unprecedented slump in activity as a result of the coronavirus outbreak and measures to contain it. Last month, we estimated that output would fall 6% q/q this quarter (-2% y/y), which would have been the weakest performance in modern history.
- We had assumed that the official GDP figures would not reflect the full extent of the slowdown, as was the case during previous downturns. (See Chart 1.) But the weaker-than-expected data published on Monday suggest that we had underestimated both the size of the contraction and the leadership’s willingness to be upfront about it.
- Since Monday’s data feed directly into the calculations of the official GDP figures, we now have a sense of the scale of the likely Q1 GDP decline. The monthly production-side indices for industry and services closely track the GDP components for these sectors, which together make up 85% of the total. Both point to a contraction of around 13% y/y during the first two months of 2020. (See Charts 2 & 3.) More than half of the remaining 15% of GDP is construction which is unlikely to have fared any better judging by the unprecedented contraction in cement output. (See Chart 4.)
- The expenditure-side data paint a similarly downbeat picture – retail sales and fixed investment both contracted around 25% y/y in real terms. (See Charts 5 & 6.) Net exports won’t offset any of this slowdown given that imports were hit less immediately by the coronavirus disruption than exports – the trade balance fell into deficit during the first two months of the year. The inclusion in the national accounts of more stable forms of consumption such as housing, as well as the exclusion of volatile land purchases from investment, mean that the contraction in GDP will be less than 25% y/y. But any Q1 growth figure that doesn’t show a sizeable contraction would be completely at odds with the rest of the data at this stage.
- What’s more, the March figures are likely to show an even deeper year-on-year contraction. The high frequency data that we monitor have improved in recent weeks. But the pace of recovery has been slow and economic activity is still on track to be weaker this month than the average for the first two months of the year since most of January was unaffected by the coronavirus disruptions. Given all this, we now expect official GDP to contract 20% q/q in Q1. That would be consistent with a decline of 16% y/y.
- Looking ahead, while the official figures show that the virus has been contained more quickly than had seemed likely, the return to work has been slow. Around a third of migrant workers who went home at Lunar New Year have yet to return to the cities, despite encouragement from the central government. And the scale of the shock to incomes and employment will lead to protracted weakness in demand, even with policy stimulus. Firms and households will be cautious in their spending for a while.
- The economy will also face mounting headwinds from weak foreign demand as the coronavirus disrupts activity globally. GDP among China’s trading partners looks set to contract by as much in the coming quarters as during the Global Financial Crisis. (See Chart 7.) Chinese exports will probably slump at least 15% in 2020.
- As a result, while output will bounce back strongly in Q2 (we’ve pencilled in +14% q/q), it will probably remain below the level it would have been without the outbreak throughout the year. (See Chart 8.) Across the year as a whole, the economy is likely to contract by 3%.
- Our China Activity Proxy (CAP) would normally point to growth at least as weak as the GDP figures during downturns. (See Chart 1 again.) But in its current form, the CAP will not reflect the full extent of slowdown. It is constructed to focus on signals from the more cyclical parts of the economy, notably industry and property. But the current slowdown is economy-wide, including services. Meanwhile, our property gauge, floor space under construction, only provides a reliable signal when construction sites are operating normally. We are in the midst of revamping the CAP to address these issues and will hold off publishing new figures for the time being.
Chart 1: Official GDP & China Activity Proxy (% y/y)
Chart 2: Industry Activity (real, % y/y)
Chart 3: Services Activity (real, % y/y)
Chart 4: Construction Activity (real, % y/y)
Chart 5: Consumption (real, % y/y)
Chart 6: Investment (real, % y/y)
Chart 7: Exports & Trade Partner GDP (% y/y)
Chart 8: Official GDP (% y/y)
Sources: CEIC, Capital Economics