China: GDP contracts for first time on record in Q1 2020 as coronavirus disrupts economy
Crippled by the fallout from the coronavirus pandemic, China’s economy logged its first GDP decline since at least 1992 in the first quarter of 2020. GDP contracted 6.8% in annual terms in Q1 2020, contrasting the 6.0% increase recorded in Q4 2019 and sharper than the 6.0% drop expected by market analysts. Seasonally-adjusted quarter-on-quarter GDP plunged 9.8% in Q1, contrasting the 1.5% rise in Q4 and even further below the 9.0% contraction forecast by the FocusEconomics panel.
Although the NBS does not provide a breakdown of GDP by expenditure, additional data suggests that all main GDP components declined at record rates in Q1.
In response, Chinese authorities have embarked on fiscal and monetary stimulus; however, the size of the measures have been rather limited compared to that implemented in the wake of the Global Financial Crisis or other economies affected by the pandemic. In this regard, Ting Lu, Lisheng Wang and Jing Wang, economists at Nomura, comment that:
“Despite its initial success in containing COVID-19, we believe hopes of a quick recovery are dimming, as China still faces two dire challenges: collapsing external demand due to the pandemic and the rising threat of a second wave of COVID-19 infections. […] We expect Beijing to deliver a large stimulus package soon to combat the worst recession in decades, with most of the financing to be provided by the PBoC. Specifically, we expect China’s actual broad fiscal deficit to rise to above 13% of GDP this year, which would imply a stimulus package worth ~10% of GDP.”
Looking forward, analysts are split about the strength and speed of the recovery. However, they all see that further policy action will be in the pipeline. Iris Pang, Greater China economist at ING foresees a “fat U recovery”:
“We expect that as long as strict social distancing measures are in place, China will have difficulty achieving a fast recovery. […] To further stabilise the jobs market, the central government will push harder on the “New infra” plan, to make sure that the local government special bonds issued so far this year at CNY1.1 trillion can be put into projects as soon as possible. But the difficulty is still that even getting enough capital, the projects need to run smoothly without strict social distancing measures, which we don’t think will be relaxed any time soon.”
Meanwhile, Raymond Yeung, Greater China chief economist at ANZ, pointed out that:
“Technically, the trajectory of China’s GDP growth is likely to show a V-shaped rebound to 7.9% in 2021, even though the level of output is unlikely to reach what the potential level implies for next year. […] Since structural growth is still the main source of economic expansion, the Chinese government’s stimulus will tend to target the segments which can provide a larger boost to employment and long-term productivity. China is unlikely to follow the US in using unlimited quantitative easing.”