Posted on 04/18/2022 11:15 am Updated on 04/18/2022 5:31 pm
A tentative brightening in a horizon that is getting darker and darker. China’s economy grew 4.8% year on year in the first quarter, according to data released by Beijing on Monday. This number is higher than expected and reflects a rebound in the world’s second largest economy in the first two months of 2022. However, it hides a sharp decline that began in March when several of China’s economies, including Shanghai, went into lockdown, dubbed the “zero-Covid” policy.
Month-by-month, the Chinese data is worrying. Activity in March collapsed across the board as the economy was hit by the worst Covid-19 outbreak since the first wave in winter 2020, note analysts at Nomura, for whom real GDP growth could be much weaker than the official Q1 data suggests.”
Retail sales fell sharply
In March, retail sales, the main indicator of household spending, fell 3.5% yoy, the biggest drop since April 2020, when the Asian giant was just emerging from the first wave of the crisis. Imports fell in March for the first time in over a year. Likewise, exports have slowed and manufacturing output is slowing (+5% in March vs. +7.5% in January-February).
Real estate – a pillar of the Chinese economy – continues its hellish descent. “After stabilizing earlier in the year, new home sales fell to their lowest level in two years last month as the epidemic weighed on housing demand,” notes Capital Economics’ Julian Evans-Pritchard. Housing starts fell another 20% in the first quarter.
The worst is yet to come
Economists agree on one thing: the worst is yet to come. The month of March only bears witness to the beginning of the lockdown in Shanghai, which has been partial for a month and total since April 1st. This tight containment, which follows that of Shenzhen, known as “Chinese Silicon Valley,” not only brought the country’s largest city to a standstill, but also created a huge mess in the supply chain, forcing factories to shut down to be supplied by their suppliers and then deliver to their customers. Not to mention that the resurgence of Covid-19 cases has led to severe restrictions on mobility in many regions.
“The economy is in dire straits,” warns Wei Yao of Société Générale. The April data is likely to be even worse, continues his colleague from Capital Economics. Some economists no longer rule out a decline in the Chinese economy in the spring. “The risk of a recession increases in the second quarter,” we warn at Nomura. “The domestic economy is collapsing,” says the head of a French industrial group in Shanghai. We are struggling to deliver to our customers, our customers no longer deliver to their customers, projects are being postponed. »
The biggest economic shock of the year
If China slows down, the entire global economy threatens to falter. “China’s ‘zero Covid’ policy will be the biggest economic shock of the year,” warned Alicia Garcia Herrero, chief Asia economist at Natixis, last week. The images of the Shanghai lockdown are certainly not as ominous to Western observers as the war in Ukraine, but its negative impact on the global economy could be even greater. And to remind you that China exports a third of the intermediate products consumed in the world.
Chinese Prime Minister Li Keqiang has repeatedly warned of economic risks in recent weeks. Stability is a priority for China’s communist regime, whose leader Xi Jinping is preparing for a third term at the 20th Communist Party Congress in the fall. Beijing has set a target of increasing GDP “by around 5.5 percent” this year, but many economists are skeptical and are lowering their growth forecasts.
“We expect a stronger macroeconomic response in the second quarter to support growth, but the impact will be limited if mobility remains constrained,” said Tommy Wu of Oxford Economics. On Friday, the People’s Bank of China (PBoC) announced it would cut the reserve ratio for banks by 25 basis points for the first time this year. A measure that is perceived as disappointing, a sign that Beijing is not yet ready to use the heavy artillery to save its economy.