China’s coronavirus economic slump was even worse than feared

China suffered an even deeper slump than analysts feared at the start of the year as the coronavirus shuttered factories, shops and restaurants across the nation, underscoring the fallout now facing the global economy as the virus spreads around the world.

Industrial output plunged 13.5% in January and February from a year earlier, retail sales fell 20.5%, and fixed-asset investment dropped 24.5%. The unemployment rate jumped to a record 6.2% in February, when the outbreak worsened and much of the economy was shutdown.

The outbreak of deadly viral pneumonia in Wuhan dramatically worsened in January, prompting China to lockdown Hubei province, extend holidays and restrict travel and business across the country. That brought much of the nation’s economic activity to a halt in February, undercutting a stabilization seen in December. Gross domestic product is now all but certain to contract in the first quarter compared to the same period last year — the first time that has happened since comparable data begins in 1989.

“Covid-19 made the economy stop, from factories to spending,” said Iris Pang, ING Bank NV in Hong Kong. “As the coronavirus spread to almost everywhere, global demand and global supply chains will take a hit and will feedback to China’s manufacturers and exporters in March and April.”

Even as governments in China and some other Asian nations look to be getting their outbreaks under control, the coronavirus is now spreading rapidly in Europe, the U.S. And other parts of the world. That will likely hit demand for Chinese exports, lengthening the damage to firms and the economy.

“China’s containment of the epidemic is bearing fruit, but there is a challenge ahead in controlling the spread in other countries,” National Bureau of Statistics Spokesman Mao Shengyong said in Beijing after the data was released. “Growth of the global economy and trade may slow to some extent, which will exert some impact on China’s economic growth.”

Mao was optimistic for the economy in the first quarter, arguing that 40% of first quarter GDP happens in March, which he expected to be “significantly better” than the past two months.

“The second quarter is going to see a significant rebound from the first quarter,” Mao added. “As the policy effects become more visible, with more potent measures in the next step to counter the shock, we expect that the economy will be more sound in the second half of the year.”

Although there are increasing signs that companies and people are getting back to work in March, the economy is still not back to normal.

“China is bottoming out. But it’s not going to be a V-shaped rebound,” said Raymond Yeung, chief China economist at Australia & New Zealand Banking Group in Hong Kong.

2020 targets

The People’s Bank of China bank acted on Friday to support the economy, providing banks more money to lend by cutting the amount of cash they must place in reserve at the central bank. It refrained from cutting the interest rate of its medium-term loans on Monday in step with the Federal Reserve. The move signals it’ll maintain a targeted, measured easing approach for now, in spite of the bad economic data.

Policy makers may soon have to choose between easing more aggressively to hit a growth target that’s expected to be set at around 6% for this year, or continue with its current measured and targeted strategy. This contraction in the first two months will make that growth rate much harder to achieve, and will also affect the possibility of reaching other targets.

President Xi Jinping’s administration previously pledged to double the size of the economy from 2010 by the end of this year, and re-scheduling that goal could risk the leadership’s credibility. The government could consider delaying the target by three months to the end of the first quarter in 2021, which will make it more feasible, according to Ding Shuang at Standard Chartered Bank (HK) Ltd.

China is also aiming to eliminate extreme poverty, reduce pollution and cut risk in the financial system. The nation will win these “three critical battles,” according to Mao, but for this year, the two key targets will be returning the economy to the normal path and the anti-poverty campaign, he added later.

Infrastructure investment, which was hit hard by restrictions on construction and large shortages of migrant workers, was down 30.3% from a year earlier in the first two months. That was despite local governments selling almost a trillion yuan ($143 billion) in bonds since the start of the year to pay for infrastructure projects.

“We expect infrastructure stimulus to be much stepped up to support aggregate demand and tax and fee cuts to cushion the COVID-19 shock, especially now external demand will be much dampened by the global pandemic,” said Michelle Lam, greater China economist at Societe Generale SA in Hong Kong.

The spike in the jobless rate to a record 6.2% all happened in February, as January’s unemployment rate was only 5.2%, the same as in December. That rise was due to the coronavirus, with demand for factory workers declining, the NBS’ Mao said.

“The data are awful,” said Macquarie Group Ltd Chief China Economist Larry Hu. “It’s clear that coronavirus is both a supply shock and a demand shock. It hurts both internal and external demand. It brings both inflation and deflation pressure. As such, we don’t expect massive stimulus coming out anytime soon, but China will stay in the current rate-cutting cycle.”

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