A series of grim economic numbers from China have given the world a glimpse of what might lie ahead, as countries embark on draconian coronavirus containment measures.
The Chinese economy went into free fall over the first two months of the year, data released on Monday showed, with industry, retail and investment all shrinking for the first time in history, each by double-digits.
And while the slump was quite well telegraphed in advance surveys, such as the purchasing managers’ indices, the numbers were still much worse than the average forecast.
The data came on the same day that coronavirus deaths outside China surpassed those inside, and as American efforts to arrest the economic impact by slashing interest rates to zero fell flat, with markets continuing to plunge around the globe.
For the rest of the world, similar economic shocks seem inevitable as virus control measures are escalated
“For the rest of the world, similar economic shocks seem inevitable as virus control measures are escalated,” said Chaoping Zhu, a Shanghai-based global market strategist at JP Morgan Asset Management.
The slump is largely a result of China’s far-reaching containment measures, after Beijing ordered factories and shops around the country to close for weeks following the Lunar New Year holiday. Even as of Friday, just 60 per cent of small businesses the real engine of China’s economy had reopened.
The multifaceted collapse saw industrial production, a gauge of China’s manufacturing engine, fall 13.5 per cent, retail sales fall 20.5 per cent, fixed asset investment fall 24.5 per cent and surveyed unemployment jump to 6.2 per cent. In Hong Kong, meanwhile, the economic bleed continued with a 96 per cent year-on-year drop in tourist arrivals.
All of these are record lows and come as increasing numbers of flights are grounded around the world, amid travel bans in the United States, Europe and parts of Asia.
Various US states and European countries have instigated curfews, border controls and export restrictions on medical equipment in response to a virus that ripped through the mainland’s economy over January and February, but which promises to persist for months to come.
“China’s lockdown after the Lunar New Year was particularly severe, more drastic than would be tolerated in the West. So in that sense the scale of the economic downturn in Europe and the US as a result of the coronavirus outbreak and restrictions on economic life should not be as large as it was in China,” said Louis Kuijs, head of Asia at Oxford Economics. “Nonetheless, I think that Europe and the US are both heading to a recession, given the extent of government restrictions there.”
That forecasters were so far off the mark on the data emphasized the unprecedented nature of the economic crisis in China, soon to be reflected elsewhere in the world. The coronavirus has already gone beyond what many analysts considered possible, suggesting the economic impact will be deeper than initially thought.
Combined, industrial production, retail sales and fixed asset investment account for 85 per cent of China’s economy, meaning that “taken at face value, they suggest that official gross domestic product [GDP] growth averaged minus 13 per cent during the first two months of the year”, wrote Julian Evans Pritchard, of Capital Economics, in a note.
“This would be unprecedented in China’s modern economic history GDP growth last contracted in year-on-year terms in 1976,” he added.
Furthermore, the damage being done to both demand, seen through collapsing retail sales, and supply the production slump should worry even countries less dependent on industry and exports than China.
“The extent of the declines are large enough that they will almost certainly create more permanent impacts,” said Michael Pettis, a finance professor at Peking University.
“For example many small businesses face bankruptcy, which means that even after Covid-19 fades away they will no longer contribute to demand in the economy, and the self-employed as well as employers of newly-bankrupt small businesses will lose a substantial share of their expected incomes, which means consumption will not be able to recover after the virus fades away.”
While data released in April will provide a fuller picture of the economic damage, Pettis expects a psychological lag to consumption, as people try to save more of their money in a time of great uncertainty. Weakening global demand, sure to follow the West’s gradual shutdown, are likely to hammer China’s exports once again.
But already the warning signs are there: China’s miserable Monday numbers may incentivise policymakers elsewhere to take more decisive action in the face of an extraordinary economic challenge.
“One important reason why China may have published such terrible numbers, other than helping the V-shape [recovery],” wrote Alicia Garcia Herrero, Asia-Pacific chief economist at Natixis in a tweet. “Warning the world of how bad it can be for them and pushing the Fed and others to react to vanishing global demand. Lets call it ‘coordination by threat’.”