China Q1 GDP records historic contraction of 6.8%

Beijing

CHINA'S gross domestic product (GDP) in the first three months of the year shrank by 6.8 per cent, its lowest rate on record as the coronavirus pandemic bought the world's second-largest economy to a standstill.

That is its first contraction since 1978 when China enacted its market reforms.

Although most factories say they are operating to near normal levels, the GDP figure points to difficult months ahead for China as consumers still have to start spending again and most of the export sector will remain crippled with economies now stalled in much of Europe and the US.

Much of China's vibrant services sector, which now makes up more than 50 per cent of the country's GDP, has yet to restart as small private firms were hit hardest by the epidemic.

With hopes for V-shaped recovery dashed, China now looks poised for a long recovery which could last most of 2020 before an expected rebound in 2021.

"We expect that as long as strict social distancing measures are in place, China will have difficulty achieving a fast recovery," said ING economist Iris Pang.

While new Covid-19 cases are seemingly under control, strict hygiene measures remain in place with all public places required to maintain social distancing.

Figures for March edged up compared to the compiled data for the January-February period, a sign that some parts of the economy are up and running. This is in line with March Purchasing Managers' Index (PMI) and trade data published earlier which showed a clear monthly uptick.

Industrial production fell 1.1 per cent last month, after a 13.5 per cent decline over January and February.

Manufacturing contracted by 10.2 per cent, as cars and related parts were heavily impacted by the lockdown. Car production shrank 43 per cent, and new-energy cars fell 43.9 per cent in the first quarter.

Retail sales, a gauge of consumption, fell by 15.8 per cent, following a record 20.5 per cent collapse in the first two months as consumers stayed clear of restaurants and shops.

Fixed asset investment fell by 16.1 per cent over the first three months, from an all-time low of -20.5 per cent in January and February.

Meanwhile, average incomes fell over the first quarter by 3.9 per cent, with a 4.7 per cent fall for rural residents from a year earlier.

Both the International Monetary Fund (IMF) and the World Bank have forecast dismal growth figures for 2020, with the IMF saying the world would face its worst financial crisis since the Great Depression.

While China still has to disclose its target for 2020, most analysts put full-year growth at barely above 1 per cent, compared with 6.1 per cent last year.

"Private consumption and net exports will likely remain key drags in the forthcoming quarters, while investment will continue to see a tussle of downside and upside forces between shrinking private investment and government stimulus propping up infrastructure investment," Fitch Solutions said in a note.

Beijing has responded aggressively to the slowdown with a mix of fiscal and monetary easing measures while staying clear of a full-blown stimulus which would risk trapping its banks in another debt cycle.

Analysts said there is still room for more fiscal easing as local governments now have to face millions of workers losing there jobs. The official unemployment rate was 5.9 per cent in March, but economists said as much as 250 million people may be inactive.

Further cuts in the loan prime rate and in the reserve requirement ratio are expected this month as well as a government guarantee of loans for small and medium-sized enterprises.

"We expect Beijing to deliver a large stimulus package, with most of the financing to be provided by the central bank," said Nomura economist Ting Lu.

"Specifically, we expect China's actual broad fiscal deficit to rise to above 13 per cent of GDP this year, which would imply a stimulus package worth about 10 per cent of GDP or 10 trillion yuan (S$2 trillion)."