Climbing Back Up The Cliff Will Be Slower Than Falling Off

THE LATEST ECONOMIC indicators — industrial production (see above), retail sales and fixed asset investment for January and February — bring more evidence of the economic damage brought by the Covid-19 outbreak, and raise the possibility that China’s economy will contract in the first quarter.

All three indicators fell year-on-year both for the first time and by large margins, down 13.5%, 20.5% and 24.5% respectively, the National Bureau of Statistics reported. More concerning for authorities is that urban unemployment edged up to 6.2% in February, a full percentage point higher than in the previous month.

Authorities say that outside the outbreak’s epicentre, Wuhan and surrounding Hubei province, 95% of large enterprises and 60% of small and medium-sized businesses have returned to work. Nonetheless, they are still not operating at full capacity.

Further macroeconomic stimulus measures have been announced to keep the economy going. The central bank has cut banks’ reserve requirement ratios for the second time this year to make a further 550 billion yuan ($78.6 billion) available for loans and injected an extra 100 billion yuan through the medium-term lending facility. Additional injections of credit are likely to ensure businesses have the working capital to sustain a recovery in activity.

More fiscal stimulus — increased local government bond issuance and tax and fee cuts — are planned. Infrastructure projects, such as expanding 5G networks, already in the national plan will be expedited, an official of the National Development and Reform Commission says. That will help keep employment stable.

The worst of the outbreak appears to have passed for now in China, but that is not the case in the rest of the world. Significant markets for Chinese exports such as the United States and the EU are forecast to contract in the second quarter as a result. Thus recovery in China will be measured.

China’s Economic Rebound Continues

Another clutch of monthly economic indicators confirm that the slowdown in the economy is done. Factory output, up 10.1%, and retail sales, up 14.9%, hit eight-month highs in November. Even the uptick in inflation to 2% can be read as a sign of recovery. It seems that policymakers’ holding of their nerve through the slowdown and not over-stimulating has borne fruit in a rebound with benign inflation. Monetary and fiscal policy is likely to continue as is for now. Growth for the year is likely to come in comfortably if not excessively above the official target of 7.5%, which will set the pace for 2013 and subsequent years.

China’s Economy Still Slowing

July’s monthly economic indicators now starting to be published show clearly that the hoped-for bottoming of China’s growth slowdown has yet to materialize. Both industrial output and retail sales growth slowed in the month, to 9.2% from 9.5% and to 13.1% from 13.7% respectively. That will add to the pressure on policymakers to increase the stimulative measures they have been taking. The fall in inflation to a 30-month low at 1.8% year-on-year gives them more headroom to do so.

Update: the unexpectedly slight 1% increase in exports in July is further evidence.