Supply constraints easing, demand remaining weak - Capital Economics
China Economics

Supply constraints easing, demand remaining weak

China Economics Update
Written by Mark Williams
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On current trends the extreme shock to China’s economic output caused by official closing of workplaces and limits on movement will mostly have ended by mid-April. But firm closures and job losses, lingering nervousness among consumers, and the deepening downturn overseas will keep demand depressed for much longer.

  • On current trends the extreme shock to China’s economic output caused by official closing of workplaces and limits on movement will mostly have ended by mid-April. But firm closures and job losses, lingering nervousness among consumers, and the deepening downturn overseas will keep demand depressed for much longer.
  • The official figures suggest that China’s coronavirus outbreak has been brought under control. Two months have passed since Wuhan was locked down. Only six new infections have been confirmed within China over the past week (alongside 284 cases in people arriving from abroad).
  • Economic stabilisation is taking a little longer. The Party leadership has been encouraging local governments and firms to resume normal operations since early February. Most provinces told companies to reopen on 10th February, around a week after new infections peaked. (See Chart 1.) But there are still significant dislocations. Activity across a range of daily indicators is still 20-60% below the 2019 level. (See Chart 2.)
  • However, the trajectory in most cases is positive. For example, road congestion in major cities has increased from 30% to 65% of the 2019 level over the past four weeks, while the number of people travelling on subway systems in the large cities has increased from 10% to nearly 40% of the 2019 norm.
  • If these trends continue, coal consumption at power stations (a proxy for heavy industry in Chart 3), light intensity at industrial parks (Chart 4), road congestion (Chart 5), subway passenger numbers (Chart 6), and property sales (Chart 7) will all return to the 2019 level around the middle of April.
  • A return to the 2019 level is a low threshold to aim for, given China’s usual pace of growth. And even allowing for that, these projections probably give an optimistic view of the wider economic recovery, since they assume that the economic ship can right itself. That won’t happen if many firms were forced to close and jobs were lost while it was capsized. While the government introduced support for small firms, the PMIs suggest that labour market conditions have weakened dramatically.
  • It is more likely, we believe, that stimulus spending by the government will be needed to return the economy to full employment. And at any point, recovery could be set back by a resurgence in domestic infections that would require controls to be reintroduced. It is unlikely therefore that supply disruption will end by mid-April. The current trend of recovery is likely to slow before then.
  • Drags on demand are likely to persist longer. Both consumers and firms are likely to remain cautious as long as fear of infection lingers. Footfall in shopping districts appears to have increased, but is still low. The data we track on cinema ticket sales will be interesting now that cinemas have begun to reopen: this may be one of the last activities to return to normal. And the accelerating downturn and spread of infections globally mean both that export demand is collapsing and that the government and the public in China won’t be able to relax, even if domestic infections remain contained.
  • Many are now looking to China to provide a guide to the speed at which downturns elsewhere will be reversed. The two-month lag between the leadership signalling that economic conditions should return to normal and our earliest estimate for when supply-side disruption could ease in mid-April suggests that other places should plan for a drawn-out recovery.
  • But other countries didn’t experience the extreme dislocation in labour markets that China did by implementing the lockdown when its 174 million migrants – one fifth of the working-age population – had returned to their hometowns for the Lunar New Year break. 30% of migrant workers have still not returned to the cities. At the current rate of return, they won’t all be back until the end of April, three months after Lunar New Year. (See Chart 8.) Normally they have all returned after three weeks.

Chart 1: New confirmed infections in China
(excluding arrivals from abroad)

Chart 2: Economic activity in China relative to 2019
(% of 2019 level)

Chart 3: Coal consumption at power plants
(% of 2019 level)

Chart 4: Intensity of night lights at 143 industrial parks
(% of 2019 level)

Chart 5: Road congestion across 100 cities
(% of 2019 level)

Chart 6: Subway passengers in nine major cities
(% of 2019 level)

Chart 7: Sales of property & cinema tickets
(% of 2019 level)

Chart 8: Number of people leaving 10 large cities (cumulative net flow))

Note: 2020 data are compared with 2019 data on a lunar calendar basis. There are no consistent data for new infections from 12th – 18th February. In Chart 1, the missing data are interpolated.

Sources: Sources: CEIC, Wind, Capital Economics


Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com

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