Coronavirus: China's economy shrank 6.8% in Q1, first contraction in decades

China is scrambling to fend off mass job losses that could threaten social stability.
China is scrambling to fend off mass job losses that could threaten social stability.PHOTO: REUTERS

BEIJING (REUTERS) - China's economy shrank for the first time in almost three decades of records in the first quarter, as the coronavirus outbreak paralysed production and spending, raising pressure on the authorities to do more to stop mounting job losses.

Gross domestic product (GDP) fell 6.8 per cent in January-March year on year, official data showed on Friday (April 17), slightly larger than the 6.5 per cent decline forecast by analysts and reversing a 6 per cent expansion in the fourth quarter of last year.

The contraction is also the first in the world’s second-largest economy since at least 1992 when official quarterly GDP records started.

Providing a silver lining was a much smaller-than-expected decline in factory production in March, suggesting efforts to restart parts of the economy since February are working.

However, analysts say Beijing faces an uphill battle to revive growth as the global spread of virus devastates demand from major trading partners, while domestic consumption also remains under pressure.

“First-quarter GDP data is still largely within expectations, reflecting the toll from the economic standstill when the whole society was on lockdown,” said Mr Lu Zhengwei, Shanghai-based chief economist at Industrial Bank.

“Over the next phase, the lack of overall demand is of concern. Domestic demand has not fully recovered, as consumption related to social gatherings is still banned while external demand is likely to be hammered as the pandemic spreads.”

For 2020, China’s economic growth is set to stumble to 2.5 per cent, its slowest annual pace in nearly half a century, a Reuters poll showed this week.

On a quarter-on-quarter basis, GDP fell 9.8 per cent in the first three months of the year, the National Bureau of Statistics said, just off expectations for a 9.9 per cent contraction, and compared with 1.5 per cent growth in the previous quarter.

Financial markets did not react significantly to the contraction, which was broadly in line with consensus expectations.

Statistics bureau spokesman Mao Shengyong told a press briefing after the data that China’s economic performance in the second quarter is expected to be much better than in the first.

However, weaker domestic consumption, which has been the biggest growth driver, remains a concern as incomes slow and much of the rest of the world falls into recession.

“We are hesitant to think that this is just a one quarter event, Q2 will also likely be lower than expectation,” said Mr Ben Luk, senior multi asset strategist at State Street Global Markets in Hong Kong. “To offset weakness in external demand, we will see some policy support later this month or early May.”

 
 
 

Industrial output fell by a less-than-expected 1.1 per cent in March from a year earlier. Highlighting the challenges in consumption, however, was a 15.8 per cent fall in retail sales, which was larger than expected.

PANDEMIC IMPACT

Economists’ forecasts for first quarter GDP ranged widely, given the many uncertainties around the pandemic’s economic and social impact in China.

The virus has infected more than two million globally and killed more than 140,000. China, where the virus first emerged, has reported more than 3,000 deaths, although new infections have dropped significantly from their peak.

Of major concern for policymakers is social stability among its 1.4 billion citizens, millions of whom migrate from rural areas to cities to find work each year.

China’s urban jobless rate was at 5.9 per cent in March, down from 6.2 per cent in February, suggesting the pain in the labour market is yet to be seen in official numbers.

 
 

However, analysts expect nearly 30 million job losses this year due to stuttering work resumptions and plunging global demand, outpacing the 20-plus million layoffs during the 2008-09 financial crisis.

Beijing has pledged to take more steps to combat the impact of the pandemic, as mounting job losses threaten social stability.

The central bank has already loosened monetary policy to help free up the flow of credit to the economy, but its easing so far has been more measured than during the global financial crisis.

The government will also lean on fiscal stimulus to spur infrastructure investment and consumption, which could push the 2020 budget deficit to a record high.