• Barron Martins

China’s Economy Shrinks for First Time in Decades as Virus Hits

China’s economy recorded the first contraction in decades in the first quarter as the coronavirus outbreak shut down large parts of the world’s second-largest economy and dimmed the global outlook.

Gross domestic product shrank 6.8% in the first quarter from a year ago, the worst performance since at least 1992 when official releases of quarterly GDP started, missing the consensus forecast of a 6% drop. Factory output fell 1.1% in March, retail sales slid 15.8%, while investment decreased 16.1% in the first three months of the year.

Policy makers will nevertheless take encouragement from the marked improvement in industrial output, which had suffered a double-digit fall in the first two months of the year. A key question for recovery prospects is the extent to which consumers regain confidence as the lockdowns are lifted.

“The data confirm China is, for now, healing,” said Shaun Roache, APAC Chief Economist at S&P Global Ratings. “Still, it is becoming clear that consumption will lag as the economy enters the transition period between lockdown and vaccine.”

That could reinforce the need to keep stimulus settings moderate for now, especially as the spread of the virus around the world also threatens to add fresh downward pressure on China’s exporters in the months ahead.

China’s markets held gains after the release as investors digested the data. The Shanghai Composite Index was up 0.8% at 10:38 a.m., while the Hang Seng Index climbed 2.6% in Hong Kong.

China’s 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 disappointingly slow and the return rate only inched up to around 90% at the end of March, Bloomberg Economics estimates.

To cushion the economic blow, China has unveiled a range of support measures, although not on the scale of other nations. That includes 3.55 trillion yuan ($502 billion) in low-cost funding provided to financial institutions, 1.29 trillion yuan in pre-approved local government special bonds, and 1.6 trillion yuan in cuts to various fee taxes, according to the nation’s cabinet.

The central government is also mulling other policies like raising the deficit-to-GDP ratio, issuing special sovereign bonds and increasing the local government special bond quota, in order to fuel a faster economic recovery, according to a recent article from a senior official.

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

Exports fell less than expected in March as production capacity was gradually restored. But economists warn bigger headwinds lie head 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.”

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