Economy can stage solid recovery after Q1
If the central authorities’ policies can be implemented to the letter, the real economy and the job markets could be gradually stabilized in the first quarter, laying a solid groundwork for a quick and strong recovery in the following quarters.
The impact of the novel coronavirus outbreak on the economy will likely slow China’s GDP growth in the first quarter to about 5 percent year-on-year, down from the original estimate of around 6 percent (although a late burst of economic activity in March cannot still be ruled out, in which case the actual figure could be higher).
If the epidemic is reined in by, say, the end of March, the economy can still manage to maintain its stable growth trajectory for the full year.
A turning point by March-end is not wishful thinking but within the realm of possibility, given the current decline in the number of newly confirmed cases in areas beyond as well as within Hubei province, where the disease exploded in January.
Until that point, economists had widely expected the country’s yearon-year GDP growth this year to be around 6 percent or even higher than 6.1 percent of last year, given the signs of rising economic activities that emerged in the last two months of 2019.
But the impact of the epidemic on the economy so far has forced them to revise their estimates.
To be sure, the epidemic and nationwide measures to control its spread will affect economic activities. Some sectors like retail, catering and tourism are among the hardest hit. Other sectors like e-commerce and services have actually benefited from the epidemic. But, overall losses remain huge.
Estimates suggest losses from the catering, retail and tourism markets during the traditional Spring Festival holiday (Jan 24 to Feb 2) alone could add up to 1 trillion yuan ($143.3 billion).
China’s GDP scale in the first quarter tends to be the smallest compared with the other three quarters, due to production disruptions caused by the Chinese New Year holiday. Yet, the epidemic’s impact on the economy this quarter has been so widespread that the whole-year GDP growth will likely be affected considerably.
But if the authorities take stringent quarantine measures to contain the spread of the virus and ultimately put it under control sooner than later, the economic impacts on the whole-year growth could still be limited.
History has some clues as to how to assess the current situation.
In 2003, SARS caused factory shutdowns and people had to stay home in self-quarantine. In the second quarter of that year, in which the disease peaked, GDP growth declined by about 2 percentage points.
However, following the lifting of restrictions on economic activities after the virus disappeared in summer, GDP growth rebounded. Whole-year growth reached 10 percent year-on-year, compared with 9.1 percent registered in 2002.
Today’s scenario is certainly different from that in 2003, but the economy’s rebound that year tells us that once the epidemic is controlled and economic activities are resumed, there will likely be a robust rebound.
Moreover, though the current novel coronavirus is said to be more infectious than the virus that caused SARS, it could be contained sooner as traditional Chinese medicine has been allowed to play a larger role this time in treatments. This should hopefully reduce the duration of the disease and alleviate its impacts on economic growth.
Admittedly, the Chinese economy at that time was on an upswing, having started to recover from the fallouts of the 1997-98 Asian Financial Crisis. Its growth further accelerated to 10.1 percent in 2004.
Things are different this time. The Chinese economic growth has been on the decline in recent years. But its improvement in the last two months of 2019 could have heralded a longawaited recovery, if not for the disruption caused by the epidemic.
So, it is reasonable to expect a strong rebound in growth, driven by repressed demand, in the third and fourth quarters to at least partially offset the adverse impacts of the current epidemic.
As the virus spread has eased, many factories and companies have started resuming production. President Xi Jinping said at a meeting on Sunday that unremitting efforts should be made to pursue orderly resumption of work and production while continuing to control the spread of the disease.
Each region should adopt a differentiated approach in line with their local health risk situation when enterprises resume work and production, Xi said.
Xi also said the role of macroeconomic policies should be strengthened, and the fiscal policy should be made more proactive and the prudent monetary policy more flexible. More targeted interim policies in cutting taxes and fees should be rolled out to help micro-, small- and medium-sized firms, he said.
As more enterprises start to resume work and the authorities take larger-scale all-round supportive measures in response to the call of the central leadership, hopefully the impacts of the epidemic on the economy could be mitigated in the first quarter.
If the central authorities’ policies can be implemented to the letter, the real economy and the job markets could be gradually stabilized in the first quarter, laying a solid groundwork for a quick and strong recovery in the following quarters.
So far, the central bank has injected liquidity into the market and carried out open market operations to guide down real interest rates to benefit the corporate sector. And the fiscal authority will continue to increase fiscal inputs to cut taxes and help build more infrastructure projects.
Another helping hand comes from the foreign trade front. As China and the United States have signed their phase-one trade and economic deal, the market uncertainties as a result of their previous disputes have gradually eased. And the world economy is expected to improve this year, which will jazz up demand for Chinese products, according to estimates by major international organizations.
President Xi warned on Sunday that the epidemic situation remains grim and complex. Indeed, it is not time to relax yet. But the situation is improving. The need now is for the authorities to take all possible measures to fight and control the epidemic. The sooner it is controlled, the more possible it is for the Chinese economy to gain a firm footing and recover solidly this year.