China’s First-Quarter GDP Growth Raises An Eyebrow

Chart showing China's quarterly GDP growth year on year from 2019 to date

THERE HAS BEEN much about China’s latest surge in Covid-19 infections to cause a raised eyebrow.

That its largest city Shanghai, now entering its fourth week of strict lockdown, has only just officially reported its first three virus-related deaths is one. The first-quarter GDP figure announced today by the National Bureau of Statistics, at 4.8% growth year-on-year, is another.

Thre is a huge political incentive for officials not to report Covid-19 deaths, given Beijing’s doubling down on its narrative that its zero-Covid policy in prioritising saving citizens’ lives is superior to the West crass re-opening at any cost. That and ultra-narrow criteria for ascribing a death to Covid make it highly likely that Covid-19 deaths have been undercounted on a scale in China that far exceeds undercounting elsewhere.

Local officials have long suspected overcounting economic activity, although much less so of late. Yet every tallying muscle must have been strained to record 4.8% y-o-y GDP growth in the first quarter and 1.3% growth from the final quarter of 2021. Private economists had forecast around 3.5% and barely 1.0%, respectively.

It may well be that growth was sufficiently strong in the first two months of the quarter that it offset much of the sharp slowdown evidenced by March’s drop in retail consumption and slowing industrial output and investment spending. (It is also prudent to remember that these are preliminary data that may yet get revised.)

Retail sales contracted 3.5% from a year ago, the first decline since July 2020; industrial output growth decelerated to 5% from the 7.5% expansion in January-February. Investment growth also slowed to 9.3% in the first quarter from 12.2% in the first two months of the year.

The relative strength in industrial production and investment is surprising given the already-reported weakness in some of the sector numbers underpinning them, such as sharp falls in car and cement production.

The economic damage inflicted by Covid lockdowns would have intensified toward the end of March, with Shanghai going into lockdown on March 28. A group of economists at Chinese and US universities estimated that a month-long lockdown of the city would cut 2.7% off national GDP for the month.

Shanghai is now entering its fourth week of a lockdown that has closed many factories. The longer the lockdown-induced impacts on production drag on, the larger the spillover effects through supply-chain disruptions on the rest of the economy.

Beijing will be anxious to minimise those given the multiple headwinds the economy is facing, few, such as the Russian invasion of Ukraine with its consequent impact on commodities prices, within its control.

The Ministry of Industry and Information Technology has sent a team to help more than 600 companies in Shanghai restart operations, including those producing computer chips, cars and car parts, medical supplies and equipment and pharmaceuticals. ‘Closed-loop’ bubbles for industrial workers will be imposed. Limited production at plants supplying Apple and Tesla resumed this way over the weekend.

Less easy to address and politically more concerning is the rise in unemployment the lockdowns are causing. At 5.8% in March, joblessness was at its highest level since the early part of the pandemic.

The economy is likely to get worse in April before it gets better. China’s ambitious goal of 5.5% GDP growth for the year looks distant. Increasingly frequent warnings from top leadership about the economic headwinds from geopolitical tensions, inflation pressures and slowing external demand underline this.

More monetary and fiscal stimulus is inevitable to bridge the economy to the point where more effective vaccination can relieve the necessity for economy-sapping lockdowns to contain a virus whose increasingly contagious if less deadly mutations are outrunning zero-Covid’s capacity to contain them.

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One response to “China’s First-Quarter GDP Growth Raises An Eyebrow

  1. Pingback: Policy Shift Will Favour China’s Tech Platform And Real Estate Firms | China Bystander

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