What China tells us about the likely shape of recovery - Capital Economics
China Economics

What China tells us about the likely shape of recovery

China Economics Update
Written by Mark Williams
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The economic recovery underway in China gives some useful pointers to what lies ahead for the rest of the world. An initial increase in activity can happen rapidly once lockdown measures are eased. But this will soon run into constraints resulting from subdued demand. Consumers and firms will remain nervous, and labour markets weak. Services will lag manufacturing. And lockdown measures may have to be tightened again if infections reappear.

  • The economic recovery underway in China gives some useful pointers to what lies ahead for the rest of the world. An initial increase in activity can happen rapidly once lockdown measures are eased. But this will soon run into constraints resulting from subdued demand. Consumers and firms will remain nervous, and labour markets weak. Services will lag manufacturing. And lockdown measures may have to be tightened again if infections reappear.
  • The lockdown in China enabled a rapid return to work. The number of new infections peaked after two weeks and most provinces told firms to reopen a week after that, from 10th February. (See Chart 1.) Lockdowns elsewhere look set to last longer, perhaps because they were implemented when case numbers had already risen much higher. Under a thousand cases were reported in China at the time of its lockdown.
  • Admittedly, there are good reasons to question China’s infection data. (See our latest China Weekly.) But the trends are probably reliable. The leadership would not have pushed for a reopening if it thought that the virus was still spreading rapidly. And a continuing exponential increase in infections could not be concealed for two months.
  • The initial rebound in activity in China was fairly fast. It was held back by the fact that China’s lockdown had trapped close to 200 million migrant workers in the home-towns they had returned to for the Lunar New Year holiday. Around a quarter are still there. Even so, the reopening of workplaces between mid-February and early March was reflected in a substantial recovery in activity across different sectors.
  • Chart 2 shows some of the daily measures we have been tracking – passenger numbers on subways, long distance travel, property sales and power output (as proxied by coal consumption by power plants) – all relative to their level in 2019. A simple average of these four rose from 22% of the 2019 level when the restart began in mid-February to 52% in mid-March.
  • But after the initial rebound, the recovery seems to have slowed. The four-measure average has risen only to 59% since the middle of March. (See Chart 2.)
  • In addition, the recovery has been uneven. While power demand – which in China is driven by industry – has recovered to 90% of its level a year ago, the service sector activity captured by the other series in Chart 2 is more subdued. That makes intuitive sense: many services depend on personal interaction, which is likely to remain depressed while concerns about infection linger.
  • China’s authorities have been trying to encourage a return to usual spending behaviour, including by distributing shopping vouchers. But they are also treading carefully. A handful of cinemas were allowed to reopen then told to shut again. Yesterday, a county 400km from Wuhan announced a new lockdown.
  • Other countries are likely to face the same difficulties: reopening workplaces is easy once governments conclude that lockdowns can be eased. But encouraging firms and households to start spending again is hard if they remain worried about further outbreaks. And job losses and income cuts during shutdowns will have a lasting impact, holding back a full recovery of demand. Surveys suggest that labour market conditions worsened in China in March even as the economy began to restart. (See our China Chart Book.)

Chart 1: New COVID-19 Cases in China
(excluding infections in arrivals from abroad)

Chart 2: Economic Activity in China
(% of level at same point in 2019)

Sources: CEIC, Capital Economics

Sources: CEIC, Capital Economics


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