China’s economy shrank 6.8% in Q1 2020

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The coronavirus pandemic has dragged China’s economy into its worst three-month period in decades — and the road toward recovery will likely be long. But the country may still eke out some growth this year, unlike its Western counterparts.

The world’s second largest economy shrank 6.8% in the first quarter of 2020 compared to a year earlier, according to government statistics. That’s slightly worse than analysts polled by Reuters were expecting, and amounts to about 693 billion yuan ($98 billion) in lost output.

The plunge is the worst for a single quarter that China has recorded since it started publishing those figures in 1992. It’s also the first time China has reported an economic contraction since 1976, when Communist Party leader Mao Zedong’s death ended a decade of social and economic tumult. The economy shrunk 1.6% that year.

China’s three major engines for growth — consumer spending, exports and fixed asset investment — all sputtered as large swaths of the country were placed on lockdown in late January and early February to contain the spread of the virus. Retail spending dropped 19% last quarter, while exports plunged more than 13%. Fixed asset investment declined 16%.

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A barometer for the world
The country’s quarterly economic report is in some ways a barometer for the United States and Europe, which began to feel the full impact of the pandemic as the situation in China was starting to improve.

China is far from returning to normal. There are still restrictions in place for many cities, even those that have come off lockdown. And economic data for March, while an improvement over the first two months of the year, suggest the recovery is tentative. Industrial output and exports, for example, remained weak as the rest of the world contends with disruption caused by the virus.

China’s labour market continues to show signs of strain. The unemployment rate, which tracks jobless numbers in urban areas only, jumped to 5.9% in March — better than February’s record high of 6.2%, but still worse than the 5.2% China recorded in December. That means 3.6 million more people were out of work in March compared to the end of last year, according to a CNN Business calculation using government data.

Unemployment as a top priority
The country’s unemployment rate is of particular concern for state authorities.

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While the metric has often been criticized as too stable — official data has barely budged beyond 4% and 5% in recent years — messaging from Beijing before the coronavirus hit showed how concerned officials were that the existing economic slowdown would take a toll on jobs. The fact that China acknowledged record unemployment during the pandemic suggests the country knows it has a problem on its hands. Stability in employment might become the top priority for this year.

Job losses caused by the coronavirus have also weighed on consumer spending, another problem for a country that was already dealing with cooling domestic demand. Per capita income declined nearly 4% in the first quarter compared to last year. That lead to a 12.5% plunge in consumer spending, according to government data.

This could push authorities to consider additional measures to ease the country’s economic pain, including more rate cuts meant to make it cheaper for small businesses to borrow money and stay afloat.

Despite contraction, China could still grow this year
Even as China reels from the shock, the country could still end the year with a growing economy.

The International Monetary Fund earlier this week predicted that China’s economy will grow 1.2% in 2020 before jumping 9.2% next year — making it the best performer among major economies.

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Chinese officials seem wary of making predictions, though. While Beijing has set an annual GDP target every year since 1985, it has not yet done so for 2020. Even so, Chinese authorities were optimistic about the country’s prospects, pointing specifically to the recent IMF forecast. If the IMF’s predictions come true, China would average growth of 5% over the next two years, Mao said.

Analysts expect a faster recovery in China then elsewhere, bolstering its position in the world economy and continuing to close the gap with the West in terms of income and GDP per person.

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