As a result of the corona lockdown in February, China has lost about one-tenth of its economic output in the first quarter of this year, representing a 6.8 percent drop in GDP compared to the first quarter of 2019, by far the lowest figure for Chinese economic growth since the country began publishing quarterly growth rates in 1992 and probably the sharpest drop in growth since the turmoil of the Cultural Revolution in the late 1960s.
However, the economic data released today also show how China’s economy has progressed since the cautious easing of rigid restrictions in March. According to official data, industry increased production in March by almost a third compared with the previous month, and the year-on-year gap narrowed from over 13 to just over one percent. By contrast, consumption is recovering only very tentatively. Retail sales in March remained deep in the red compared to the previous year.
The way out of the crisis will be very bumpy for China. The continuing weakness in consumer spending reflects the deep uncertainty of the Chinese after the weeks of curfew. Current surveys indicate that many have lost their jobs or at least had to cope with significant income losses. And whether the surprisingly strong boost in industry will continue is more than questionable. Until well into March, the global extent of the corona pandemic and its serious consequences for the world economy were barely discernible. Now, however, China’s export industry is facing a massive slump in demand. Daily data on economic activity in China show that the recovery, after a lively start at the beginning of March, lost more and more speed from the middle of the month.
In terms of fiscal policy, the Chinese government has so far been conspicuously cautious, not only in comparison with previous economic stimulus programmes, but also by international standards. The measures adopted so far correspond to barely more than 2 ½ percent of economic output. Although more is likely to come in the coming months, Beijing seems to be continuing to refrain from a major fiscal package. As a result, economic growth is likely to recover only slowly over the course of the year. In contrast to the International Monetary Fund (IMF), which sees China as one of the few growth islands in the world this year – albeit only with a mini growth of 1.2 percent – we are sticking to our forecast and expect the Chinese economy to stagnate this year at best.