World Bank Sees First Quarter Contraction in China

THE COVID-19 PANDEMIC has caused the World Bank to downgrade its growth projections sharply for the year and it is now expecting China’s economy to grow by just 2.3% this year on a baseline scenario.

The Bank’s ‘lower case’ scenario puts growth for the year at 0.1%. The economy grew by 6.1% in 2019.

As the Bank notes, China has already seen a steep drop in economic activity with high-frequency indicators pointing to a contraction of the economy in the first quarter. That number is due to be released on April 17. The Bank estimates it will fall in a range of minus 0.6% growth to minus 7.5% growth.

It also cautions that that range may be optimistic given the global economic impact of the pandemic spreading around the world.

The pace at which the government can get the economy up and running again will be critical. However, while many large industrial enterprises are starting to get back to work, few are running at anything like full capacity yet. That is even less true for most small and medium-sized firms, who are experiencing an even more fitful return.

The Bank also estimates that fewer people will escape poverty this year as a result of the pandemic. It had previously projected that more than 25 million would do so in China this year but now fears poverty rates will rise for households connected to the retail, tourism and some manufacturing sectors, which have been particularly hard hit by the virus.

Update: A reminder that the purchasing managers index (PMI) compares one month to the previous one, so it is a relative not an absolute indicator of the state of the economy, and that a score of 50 is the dividing line between expansion and contraction. Thus the newly announced rebound in the manufacturing PMI for March to 52 from February’s 35.7 means that the sector is doing marginally better than last month, which was terrible, not that the economy is back to normal, which it is not.

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