China’s economy slowed in March as consumption, property and exports were hit hard, dusting faster-than-expected first-quarter growth numbers and worsening an outlook already weakened by COVID-19 restrictions and the war in Ukraine was.
The biggest near-term challenge for Beijing is the tough new coronavirus rules at a time of heightened geopolitical risks, which have exacerbated supply and commodity cost pressures, leaving Chinese authorities on a tightrope in trying to boost growth without jeopardizing price stability .
Gross domestic product (GDP) grew 4.8% year on year in the first quarter, data from the National Bureau of Statistics showed Monday, beating analysts’ expectations for a 4.4% gain and a 4% rise in the fourth quarter.
A better-than-expected start to the first two months of the year enhanced headlines, with January-March GDP up 1.3% q/q compared to expectations for a 0.6% increase and a revised 1.5% increase % in the previous quarter.
Analysts say April data is likely to be worse as lockdowns in trade hub Shanghai and elsewhere drag on, prompting some to warn of rising recession risks.
“Further impacts from lockdowns are imminent, not only because there have been delays in the delivery of essentials, but also because they increase uncertainty in services and factories that have already impacted the labor market,” Iris said Pang, Greater China Chief Economist at ING.
“We may have to revise our GDP forecasts further if fiscal support doesn’t come in time.”
China’s stocks fell, likely reacting to March’s numbers and a weak outlook — the blue-chip CSI300 index fell 0.6%, while the Shanghai Composite index fell 0.5%.
Deterioration in retail sales, unemployment rate
Data on March activity showed retail sales have fallen the most on a yearly basis since April 2020 due to widespread COVID curbs across the country. They fell 3.5%, worse than expectations for a 1.6% drop and 6.7% rise in January-February.
The job market is already showing signs of stress in March, a normally robust month for the job market, as factories resume hiring after the Lunar New Year holiday. China’s nationwide survey-based unemployment rate stood at 5.8% in March, the highest since May 2020, while the unemployment rate in 31 major cities hit a record 6%.
The industrial sector fared better with a 5% yoy increase in production compared to forecasts for a 4.5% increase. That was less than a 7.5% increase in the first two months of the year.
Fixed investment, a growth engine Beijing is banking on to shore up the economy, rose 9.3% year over year in the first quarter, compared with an expected 8.5% increase but a decline of 12.2% growth in the first two months.
Analysts from Capital Economics and Nomura believe official GDP numbers may have underestimated the slowdown in the last quarter.
According to Capital Economics, growth in the Q1 services production index does not coincide with the expansion of the services sector in the GDP data, while Nomura said some of the March data, such as industrial production, are difficult to reconcile with many other indicators of industrial activity .
Home sales by value plunged 26.2% year-on-year in March, the biggest drop since January-February 2020, according to Reuters calculations, signaling a deepening downturn in the housing market.
Very costly COVID-19 curbs
Government determination to halt the spread of record COVID-19 cases has clogged highways and ports, stranded workers and closed factories – disruptions that are sweeping global supply chains for goods from electric vehicles to iPhones.
The contribution of net exports to GDP growth fell to 3.7% in the first quarter from 26.4% in the fourth quarter as momentum slowed. Fu Linghui, an NBS spokesman, acknowledged the increasing downward economic pressure.
“We will speed up the implementation of macro policies, make every effort to stabilize economic fundamentals and strive to achieve the goals and tasks for the year,” Fu said at a news conference.
The People’s Bank of China (PBOC) said Monday it will step up support for industries, firms and people hit by COVID-19 in its latest move to cushion them from the impact of the economic slowdown.
Late on Friday, the PBOC said it will cut the amount of cash banks are required to hold as reserves for the first time this year, freeing up around 530 billion yuan ($83.25 billion) in long-term liquidity, though the reduction missed the expectations.
Analysts see less room for further interest rate cuts in China after the RRR was cut less than expected, which they said reflected PBOC concerns about inflation and US monetary tightening.
“The government faces a dilemma: how to balance economic growth and contain the outbreaks? Sealing off big cities like Shanghai is very costly,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.
“Such costs will become more visible in the coming months.”
