The Strategist

Chinese GDP loses 6.8% in Q1

04/21/2020 - 03:09

China has become the first country to report a sharp drop in business activity due to COVID-19. According to the National Bureau of Statistics of the PRC, the country's GDP in the first quarter of 2020 fell immediately by 6.8% in annual terms. At the same time, the decline in retail sales in China was more significant than that in industrial production. Experts believe that, despite the PRC's success in the fight against coronavirus, business activity in the country is unlikely to recover before June. However, according to the results of the whole year, economic growth supported by state investments will still be positive.

China's GDP in the first quarter of this year decreased by 6.8% year-on-year, or by 9.8% compared to the fourth quarter of 2019. Recall that in general, in 2019, the Chinese economy added 6.5%. Analysts interviewed by Reuters before the data was published, estimated the decline rate at 6.5%, Bloomberg - at 6%. The urban unemployment rate, which has remained at 5% for decades, rose to a record 6.2% in February 2020, but in March it fell slightly to 5.9%.

According to the results of the first quarter, Chinese industrial production decreased by 8.4%. However, the indicator includes both a drop of 13.5% in January-February, and a much less significant decrease in March - by 1.1%.
Some sectors of the PRC industry suffered more than others - for example, in the automotive industry output fell by 43%. In pharmaceuticals, telecommunications, and robotics, by contrast, there was growth. Retail sales in China fell 19% over the quarter, which is noticeably worse than expected. Sales of clothes, furniture and cars sank the most. At the same time, in March the decline remained significant (minus 15.8% after minus 20.5% in January – February). In turn, capex in the first quarter fell by 16.1% (in January-February, it fell by 24.5%, but in March grew by 6.05% due to a sharp increase in government investment).

The total exports of China decreased by 3.5% for the quarter, imports - by 2.4%.

According to Euler Hermes experts, the authorities are ready to direct 6.5% of GDP to support the country's economy, mainly in the form of state investments in infrastructure (the government approved a large-scale investment plan for 5G networks, big data processing centers, artificial intelligence and in the production of charging stations for electric vehicles). The measures taken by the National Bank of China (reduction of reserve requirements, reduction of certain types of rates) are equivalent to investing another 2.8% of GDP. All this will help maintain growth in the PRC - at the end of the year, the country's GDP may increase by 1.8%, and accelerate to 8.5% in 2021. The International Monetary Fund predicts that the growth rate will be minimal in China this year, but nonetheless positive - 1.2% (in 2021 - plus 9.2%).

However, economic recovery may be delayed due to the risk of a second wave of coronavirus infection, Euler Hermes warned that full recovery should not be expected before June. ING Bank notes that a quick return to growth is hardly possible as long as restrictions on movement remain in place. Export data will remain weak for at least another quarter due to restrictions in other countries. Note that, according to a survey of economists conducted by Focus Economics, almost 20% of respondents expect a decrease in global GDP by more than 5% this year, 17% by 3.1-3.5%, and 15% by 2, 6–3%. Moreover, the vast majority of respondents expect that the global recession will last two quarters.