GDP contraction of 6.8 % foreshadows pain likely to be reported world-wide
By guest author Jonathan Cheng from Wall Street Journal. Liyan Qi, Grace Zhu and Bingyan Wang contributed to this article.
China’s economy shrank 6.8 % in the first three months of 2020 compared with a year earlier, the first such contraction since Beijing began reporting quarterly gross domestic product in 1992.
The collapse foreshadows the pain expected in the U.S. and around the world as the coronavirus pandemic shuts borders, halts business activity and cripples global supply chains.
Following a 6.0 % gain in the last three months of 2019, the pullback was actually gentler than the 8.3 % median forecast of 15 economists polled by The Wall Street Journal. Compared with the previous quarter, China’s GDP contracted by 9.8 %.
The underlying picture offered some signs of recovery after a nadir in February, though the numbers underscored the weakness of consumer spending. China’s urban jobless rate, largely static around 5% for years despite the ups and downs of the economy, remained at an elevated 5.9 % at the end of March, after a record 6.2 % reading in February.
Retail sales in March were off 16 % from a year earlier, much worse than the 8.0 % expected.
Industrial production for the month was down 1.1 % from a year earlier, better than the expected 7.5 %. For the quarter, fixed-asset investment was off 16 %, in line with expectations, property investment was down 7.7 % and housing sales off 23 %.
While the coronavirus has flattened economies around the world, China has been reckoning with it the longest. The virus first emerged there late last year, and by late January authorities had shut down much of central Hubei province, population nearly 60 million. The suspension of all but the most essential commercial activity lasted for roughly two months.
“The nature of this shock is really different than anything we’ve ever seen in our lifetimes,” said Andrew Tilton, chief Asia Pacific economist for Goldman Sachs. On an annualized basis, he said, the first-quarter hit put China on pace for the deepest hit in more than four decades.
“I don’t think we’ve seen anything like this since 1976,” Mr. Tilton said—the year Mao Zedong died.
China’s recovery remains fragile. Many restrictions have been lifted but some new ones have been enacted, including tightened restrictions on international flights, in a bid to prevent a second wave of infections from abroad.
Economists and analysts have been keeping close tabs on China’s economic recovery. One economic-research firm, Trivium China, estimates business activity now exceeds 80% of capacity, up from roughly 70% a month ago.
“That last 20% is going to be harder than all the progress made so far,” Trivium’s analysts wrote in a note to clients on Thursday.
While China has shifted its economy toward domestic consumption in recent years, it remains heavily reliant on exports, which have faced a raft of challenges this year. Gnarled supply chains have prevented materials from reaching the factory floor, while domestic travel restrictions have blocked laborers from returning to workplaces following trips to their hometowns for the Lunar New Year holiday in late January.
Now, most worrying of all, China’s customers in the U.S. and across the West are largely shut, and demand is likely to remain depressed for the foreseeable future.
“It’s the biggest challenge to the Chinese and the world economy during peacetime in modern history,” said Ding Shuang, head of greater China economic research at Standard Chartered. Where previous economic downturns developed gradually, he said, the coronavirus shock was like “a sudden hit of the pause button.”
On Friday (April 17, 2020) Mao Shengyong, a spokesman for the National Bureau of Statistics, put an optimistic face on the situation, though he did allow that growth will be difficult to sustain as the global economic picture deteriorates.
Addressing reporters on Friday, Mr. Mao said China’s economy “improved notably” in March and that the momentum would likely continue into April and the rest of the second quarter. He also affirmed that China hadn’t suffered any large-scale layoffs from the pandemic, though economists have come to different conclusions.
Investment bank UBS estimates that 50 million to 60 million service-sector workers and 20 million more in the industrial and construction sectors had lost their jobs or been unable to return to work in the first quarter because of travel restrictions and other quarantine measures.
The bank expects the labour market to recover as more workers find new jobs. Even so, UBS predicts nonfarm employment to fall by 14 million for the year, wiping out more than two years’ overall job gains. China’s working-age population is about 900 million.
More generally, some economists have questioned whether China’s jobless rate accurately captures the labour market, since layoffs among migrant workers and other groups aren’t included in the survey.
Equally worrying as jobs come under pressure, China reported Friday a year-on-year decline in urban residents’ inflation-adjusted disposable income—the first since the government began to release the data in 2002. That could deliver a blow to domestic consumption, which now accounts for more than half of China’s economy.
The first-quarter plunge in GDP puts Beijing deep in a hole at the beginning of what leaders had hoped would be a year of triumph. President Xi Jinping had set year-end goals of doubling overall GDP levels from a decade earlier, and, eliminating poverty—all in the name of building up what the leadership has called “a moderately prosperous society in all respects.”
Economists say meeting those political goals requires full-year GDP growth of about 5.5 %—which economists largely regarded as attainable before the coronavirus first emerged into public view in mid-January. But the historic first-quarter decline means the economy must now rebound sharply.
Some economists have speculated that China this year could drop its custom of setting a formal economic-growth target. Standard Chartered’s Mr. Ding suggested China could effectively write off the disastrous first quarter and set a growth target for the rest of the year. Mr. Tilton of Goldman Sachs says that, in the longer run, the growth target could be replaced with an employment target.
The target is typically set at annual leadership meetings held in early March—though this year’s have been postponed because of the coronavirus.
Dropping the formal target would give leaders more policy flexibility in this year of unprecedented challenge, with smaller businesses at risk of failing and joblessness on the rise. Already, the country is expecting to have the job market flooded by the largest class of college graduates in a decade.
Other economists have pinned their hopes on a major government stimulus plan to jump-start business activity.
On Friday, Mr. Mao of the statistics bureau said that officials would unveil more policy measures to soften the impact from the pandemic if needed, with a focus on propping up domestic demand.
“My understanding is that this year and next year, on average, growth should be above 5%,” he said.