April 17, 2020 / 2:40 AM / 2 months ago

Instant View: China's first-quarter GDP posts first decline on record as virus shuts down economy

(Reuters) - China’s economy shrank 6.8% in January-March from a year earlier, official data showed on Friday, the first such decline since at least 1992 when quarterly gross domestic product (GDP) records began.

A street cleaner walks by Beijing's Central Business District during morning rush hour as the spread of the new coronavirus disease (COVID-19) continues in China, April 17, 2020, REUTERS/Thomas Peter

The historic slump in the world’s second-largest economy comes after efforts to contain the coronavirus, which first emerged in China late last year, shut down factories, transport and shopping malls.

KEY POINTS

* Q1 GDP -6.8% y/y (f’cast -6.5%, Q4 +6.0%)

* Q1 GDP -9.8% q/q (f’cast -9.9%, Q4 +1.5%)

* March industrial output -1.1% y/y (f’cast -7.3%, Jan-Feb -13.5%)

* March retail sales -15.8% y/y (f’cast -10%, Jan-Feb -20.5%)

* Jan-March fixed asset investment -16.1% y/y (f’cast-15.1%, Jan-Feb -24.5%)

* Jan-March property investment -7.7% y/y (Jan-Feb -16.3%)

COMMENTARY:

MASAAKI KANNO, CHIEF ECONOMIST, SONY FINANCIAL HOLDINGS, TOKYO

“It was already known that there would be a sharp contraction in the first quarter, so the point is what recovery there will be from the April-June quarter.”

“Japan and the United States are likely to have large negative gross domestic product figures in April-June, so if China will recover, I think it will become a source of hope to the world economy. But the problem is that China’s external demand will remain insufficient, so we can’t have hopes of enough growth based only on domestic demand.”

JULIAN EVANS-PRITCHARD, SENIOR CHINA ECONOMIST, CAPITAL ECONOMICS

“GDP contracted in Q1 for the first time since China began publishing quarterly data in 1992. The monthly data suggests that activity improved in March but remained weak even as efforts to contain COVID-19 were relaxed.

“The March data adds to broader signs that China’s economy is past the worst. But the recovery will probably continue to underwhelm. Indeed, the high frequency indicators we track suggest that, after an initial bounce as containment measures were eased, the recovery in activity has since slowed to a crawl.

“One problem is that domestic demand is being held back by labour market strains: the unemployment rate remained elevated in March, and per capita incomes declined outright in Q1. Meanwhile, the double-digit decline in industrial sales for exports last month adds to signs that external headwinds are intensifying. China is in for a drawn-out recovery.”

ATSUSHI TAKEDA, CHIEF ECONOMIST, ITOCHU ECONOMIC RESEARCH INSTITUTE, TOKYO

“Retail and fixed asset investment dropped by 20% in January and February, so the GDP wasn’t an unexpected figure.”

“What’s next in focus is what the pace of recovery will be in the April-June and July-September quarters. The United States, Europe and Japan’s economies will drop sharply in the second quarter, so while I think domestic demand will recover, exports are likely to fall sharply and the power of the recovery will be weakened.”

HUA CHANGCHUN, CHIEF ECONOMIST, GUOTAI JUNAN SECURITIES, SHENZHEN, CHINA

“Q1 data indicated that the central government is likely to play down the gravity of setting an annual growth target during the two sessions, and instead focus on the unemployment rate. The figure also means that the government is unwilling to copy the massive stimulus model back in 2008.”

“Industrial production picked up faster than expected, but the retail sales data showed that consumption is in slow recovery.”

“The impact of the coronavirus outbreak overseas has not shown fully on the trade front, so there’ll be lingering pressures on the economy in Q2. Employment in the import and export sectors will take the blow, and we expect both central and local governments to continue to offer support to soften the impact.”

“We expect the central bank to cut LPR by another 20 bps this year to lower the borrowing cost for companies. And, it’s still very likely for the PBOC to cut the benchmark deposit rate by around 25 bps to ease the pressure for banks.”

FRANCES CHEUNG, HEAD OF MACRO STRATEGY, ASIA, WESTPAC BANKING CORP, SINGAPORE

“Considering the wide range of forecasts, it was not a big miss for Q1 GDP. Market appears (to be) looking past Q1, as a bad quarter had been expected.

“March industrial production showed some improvement – while one may argue that partly reflected unfulfilled orders in February, that still means production in Q1 as a whole was mildly less weak than initially thought.”

TAKESHI MINAMI, CHIEF ECONOMIST, NORINCHUKIN RESEARCH INSTITUTE, TOKYO

“With economic activity (in China) restarting, there could be a second phase of infections. I think it will be difficult to get out of negative growth.

“Consumption, investment and exports were all slow.”

LOUIS KUIJS, CHIEF ASIA ECONOMIST, OXFORD ECONOMICS, HONG KONG

“The first decline in the quarterly GDP data, which go back to 1992, is not as bad as the 8.5% y/y decrease we had expected. But we estimate that it implies a seasonally adjusted plunge of 10.6% compared to Q4 2019.

“Monthly data on industrial value added, investment and retail sales show decelerating y/y declines in March, suggesting that a substantial sequential recovery is underway, with industrial value added falling only 1.1% y/y in March, compared to 13.5% in the first two months.

“We expect this recovery to continue and to show up in the GDP data from Q2 onwards as more progress is made with the return to economic normalcy. However, the upturn will be slowed down by lingering consumption weakness and sliding foreign demand. We expect it to take until Q4 before year-on-year growth reaches around 4%.”

BEN LUK, SENIOR MULTI ASSET STRATEGIST, STATE STREET GLOBAL MARKETS, HONG KONG

“We are hesitant to think that this is just a one quarter event, Q2 will also likely be lower than expectation.

“To offset weakness in external demand, we will see some policy support later this month or early May... we expect policy response in the property market, with looser credit not just for developers but in household loans as well, there may be looser buyer restriction too.”

“What’s different this time is that China can’t rely on external demand. That’s why we see a weakening RMB because there is no point in weakening your currency to support export right now... Instead, we could see a strengthening currency to alleviate stress on imports... We could see a stronger CNY going into the second half.”

KEN CHEUNG, CHIEF ASIAN FX STRATEGIST, MIZUHO BANK, HONG KONG

“The data came largely in line with market expectations. Industrial output in March was actually better than forecasts, suggesting the pace of work resumption could be faster than markets had thought. However, consumption still needs a boost.

“I believe markets will quickly digest the data. Given the fact that the economy remains weak, I expect the central bank to continue easing.

“The currency’s movement is still dependent on the virus situation globally. And, I see chances the yuan could trade towards 7 per dollar mark.”

AYAKO SERA, MARKET STRATEGIST, SUMITOMO MITSUI TRUST BANK, TOKYO

“I have some doubts about the data, particularly industrial production. If you look at industrial production month-on-month, it shows output rose slightly in March. I doubt Chinese factories were able to recover that quickly.

“I wouldn’t get too optimistic. China won’t do well unless it can ship more exports, and right now other countries are still in a weak state because of the coronavirus.

“China is reluctant to cut interest rates because it is wary of a weak yuan, so it is more likely to opt for fiscal measures to prop up domestic demand.”

SHANE OLIVER, HEAD OF INVESTMENT STRATEGY AND CHIEF ECONOMIST, AMP CAPITAL, SYDNEY

“The figures are better than feared, and things look like they are improving. The worst is probably over and, as long as the coronavirus can be contained, growth should bounce back strongly this quarter.

“Whether it will recover the full 10% is hard to say, but the recovery looks real. Weekly data on transport, energy usage, property sales and the like all show an improvement.

“That will help the global economy, though China will not be able to lead a world recovery like during the GFC. Its stimulus is not as large as back then.”

JACOB DOO, CHIEF INVESTMENT OFFICER, ENVYSION WEALTH MANAGEMENT, SINGAPORE

“I think activity will continue to increase compared to what we see overseas and the only concern is more about exports, as export markets are not going to be full running.

“Given what’s happening around the world, the Chinese are just not going to travel around, which means that demand will be kept within the economy. So, local demand is going to increase tremendously compared to last year, but the external part is going to slow down tremendously.

“As for the properties side, demand may not pick up as much because people don’t know how this thing’s gonna pan out, whether they will have a job. So, if the developers are not able to offload the inventory, they may struggle for a while.

“I am turning from neutral to slightly bullish on the China market itself and, within that, the sectors I’ll be gradually bullish towards are on the consumer side and industrials.”

ROB MUMFORD, LEAD MANAGER OF CHINA EQUITY STRATEGY, GAM INVESTMENTS, HONG KONG

“This is very encouraging. Consensus has been behind the curve. This takes the outlier (downside) scenario.

“Industrial production was better than expected. Anecdotally we have seen recovery in property sales, coal, power consumption, productivity. This very much points to a valley, not a L-shaped (growth trend)... today’s data supports the valley theme.”

NATHAN CHOW, SENIOR ECONOMIST, DBS, HONG KONG

“This is not a surprise to the market.

“But some of the indicators in March have performed relatively better compared to the first two months of the year, particularly industrial production. It shows the economy is gradually recovering from the very worst.

“But I think in the second quarter we will see at most a stabilisation, not a rebound, because cases are still rising for most of China’s trading partners, which will dampen orders going forward. Based on this first-quarter number, I would say the whole year GDP growth would be something around 2%.”

BACKGROUND:

- China, where the new coronavirus first emerged, has reported more than 3,000 deaths although new infections have dropped significantly from their peak.

- 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

- 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.

- Beijing has pledged to take more steps to combat the impact from the pandemic. 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.

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

Reporting by Asian bureaus; Compiled by Subhranshu Sahu

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