Economy rebounding after deep contraction
China’s economy experienced a deep contraction in the first quarter due to disruptions caused by the novel coronavirus outbreak, but major economic indicators improved substantially in March, indicating the country’s recovery has gained a firmer footing, officials and economists said on Friday.
Supportive government policies are expected to intensify in the coming quarters to expand domestic demand by stimulating investment and consumption as the global spread of the virus may bring more headwinds to the world’s secondlargest economy.
China’s GDP in the first quarter contracted by 6.8 percent from a year earlier, according to the National Bureau of Statistics.
While it remains unclear whether the government will still set a GDP growth target for the year, economists said China’s policy priority for the next step needs to focus on stimulating demand and stabilizing employment to facilitate a sustainable economic recovery.
More proactive fiscal policies and more accommodative monetary policies are needed to prevent the economy from experiencing a second wave of disruptions caused by the global economic downturn amid the COVID-19 outbreak, they added.
The country’s industrial production shrank by 8.4 percent year-onyear in the first quarter, but the decline narrowed from a 13.5 percent drop in the first two months, according to the NBS.
The outbreak created a severe blow to the country’s economy in the first quarter, but major economic indicators rebounded in March and the country’s economic performance will improve further in the second quarter, NBS spokesman Mao Shengyong said at a news conference in Beijing on Friday.
The government will step up policy support to expand domestic demand by increasing effective investment and releasing consumption potential. More tax relief and financial aid will be offered to businesses to help them resume production and make it through the difficult times, Mao said.
The Chinese stock market rose on Friday with the benchmark Shanghai Composite Index up by 0.66 percent to close at 2,838.49 points as the first-quarter economic contraction was broadly in line with investors’ expectations.
Lian Ping, chief economist at Zhixin Investment, said the government needs to intensify policy support to prevent the economy from suffering a second wave of blows from the global economic downturn and possible collapse of external demand.
Chinese companies have seen an increase in cancellations of orders. While most large enterprises have resumed production, according to NBS calculations, many smaller companies are still struggling to resume work under rising financial difficulties and labor shortages.
Retail sales dropped by 19 percent year-on-year in the first quarter, which indicated that domestic demand remains relatively weak and there is still room for policies to effectively boost households’ consumption, economists said.
Urban household income declined by 3.9 percent year-on-year in the first quarter. The urban unemployment rate was 5.9 percent in March, down by 0.3 percentage point from February, according to the NBS.
“More support needs to be given to households as the decline of residents’ income and risks associated with unemployment could affect households’ long-term consumption,” said Wu Chaoming, chief economist at Chasing Securities.
That the Chinese economy contracted by 6.8 percent year-on-year in the first quarter should not come as a surprise. Yet the job market and food supply chains remain largely stable despite the economy being battered, which is a potent sign that the economy can regain its normal growth momentum after production and retail operations resume now that China has largely contained the spread of the novel coronavirus.
Economic activities almost came to a standstill in the first two months when the country was forced to implement stringent measures, including locking down cities and restricting the movement of people and vehicles, to contain the coronavirus outbreak.
Reassuring, though, is the fact that both the unemployment rate and food prices were on the decline in March. Compared with 6.2 percent in February, the surveyed urban unemployment rate in March was 5.9 percent. And the consumer price index rose by 4.3 percent in March, against 5.2 percent in the previous month.
What is specially encouraging is that economic activities rebounded at a fast pace in March, with a series of indicators, including industrial output, retail and services, improving remarkably.
Considering that economic activities started resuming gradually only after mid-March, it wouldn’t be over-ambitious to expect an even stronger and more sustained recovery in the coming months as the repressed demand is unleashed.
The economic contraction in the first quarter, in the final analysis, may prove to be only a one-off shock. Uncertainties remain, though. The spread of the pandemic and rising death tolls in other countries since March have reduced, and will continue to reduce, global demand, and therefore affect China’s exports. But the Chinese economy may well have passed its worst. In the next stage, the authorities, on the back of a series of policy initiatives, could continue rolling out supportive policies, mainly fiscal, to ensure the corporate sector can cope with the difficulties and the job market remains stable.
By opting not to adopt a massive monetary stimulus to boost the economy, China has avoided significantly raising the debt levels, which could be a more sustainable way of regulating the economy.
As Mao Shengyong, spokesman for the National Bureau of Statistics, said, although the outbreak seriously disrupted economic activities in the first quarter, it did not destroy China’s production system and capacity.
And considering the huge size of China’s market, its massive growth potential, high-quality labor force, sound infrastructure, and perpetual opening-up policy, there is reason to believe the economy will emerge stronger from the contraction in the first quarter.