The world’s factory may be back in business, but its people are still reeling, as China’s first-quarter economic performance – its worst in more than 50 years – serves as a new warning about the depth of the crisis created by the pandemic.
China’s GDP contracted 6.8 per cent in the first three months of the year, breaking a decades-long growth streak. Behind that dire number stands an uneven recovery from the severe lockdowns imposed to slow the spread of the virus, with heavy industry back on its feet while consumers, who have become the real backbone of the world’s second-largest economy, continue to stagger.
Take the numbers in March, when parts of China began to emerge from lockdown: Industrial production slipped just 1.1 per cent over the previous year; retail sales, however, fell 15.8 per cent. Chinese policy makers have succeeded in getting big business back to work but have had much less success convincing people to start spending.
“It points to the divide between China’s ability to resume production (fast) and its ability to create demand for goods and services (much less obvious),” wrote Alicia Garcia-Herrero, the chief economist for Asia Pacific at Natixis, a French corporate and investment bank, in an e-mailed response to questions.
China is known to massage its statistics for political reasons; some Western economists estimate the real first-quarter contraction hit 20 per cent. (After weeks of accusations that Chinese authorities have understated the country’s death toll from the virus, the number of dead in Wuhan, the epicentre of the outbreak, was revised upward Friday by more than 50 per cent, to 3,869.)
Analysts and economists in China emphasized what they said were positive trends that demonstrated the resiliency of a country battered by a deadly virus but now racing to resume normal life.
If China can constrain COVID-19, “the second half of the year should be better than the first,” said Mao Shengyong, a spokesman for the National Bureau of Statistics, on Friday.
“If we compare China with other big global economies, in particular, our economic performance and the speed with which work has resumed in the postepidemic period are very outstanding,” said Mei Xinyu, a researcher with the Chinese Academy of International Trade and Economic Cooperation, a research body under the Ministry of Commerce.
“The data suggests that in March our economy has stood firm,” added Yu Miaojie, a scholar at Peking University’s National School of Development, pointing to improvement in some indicators relative to January and February.
Other indicators suggest considerably more difficult circumstances. By the end of March, real estate sales and coal consumption for electricity had risen to levels roughly parallel with those of 2019. Both have since declined again. Coal use is now down almost 11 per cent from last year, while real estate sales measured by floor space sold were off 36 per cent this week over the same period in 2019.
The first-quarter performance, meanwhile, is the worst since 1967, according to an analysis by Iris Pang, the chief economist for Greater China with ING Economics.
China has begun using some traditional tools of economic management to revive output. The issuance of local government special bonds has now exceeded $200-billion, said Ms. Pang, and some of that money is expected to fund big-project spending, a favoured method in China for undergirding growth – although policy makers are now promoting “new infrastructure” that includes data centres and towers for the expansion of 5G mobile networks.
But it’s not clear how much these measures can achieve if people are too nervous to open their wallets. Officially, China’s urban unemployment eased in March to 5.9 per cent. Some Western economic observers, however, estimate that at least 10 per cent of the country’s labour force is out of work.
And while the Communist Party’s economic controls can substantially shift the flow of investment and capital spending, the country’s leadership has struggled to nudge consumer spending in meaningful ways. In 2014, China’s private consumption as a percentage of GDP stood at 37.8 per cent; last year, it was 38.7 per cent. In Canada, private consumption makes up almost 60 per cent of GDP.
“Stoking demand, supporting demand – at this point, that’s the absolutely critical policy imperative,” said Andrew Polk, founding partner of Trivium, a Beijing-based business advisory firm. ”Businesses will not normalize their output unless they have a customer. And that means both households and other businesses.”
But doing so “might be harder for China, because that’s not their normal [modus] operandi,” he said. Consumer sentiment “very much relies on momentum and psychology” rather than massive outlays of investment such as those that have underpinned past Chinese stimulus programs.
Chinese officials have been directing cash into local stimulus programs that provide vouchers. Other programs have sought to revive car sales in particular, including bonuses for people who trade in old models.
“People were running scared in the first half of March. They were scared about losing their jobs. They were scared about dying. They were scared about stock and real estate prices collapsing,” said Shaun Rein, an expert in consumer behaviour and the founder of China Market Research Group. Chinese passenger car sales were down 48.4 per cent in March. But, Mr. Rein said, there has been ”a reasonably strong rebound in the second half of March across many sectors.”
Some spending has returned on food, beverages and health care. But there has been less appetite for jewellery or furniture and other household goods. “It would be premature to conclude the worst is past,” HSBC economists Julia Wang and Erin Xin wrote in a research note.
Yet there is institutional resistance to helping consumers.
Voucher programs “will only encourage people and companies to maintain bad habits and their heavy reliance on government,” said Mr. Mei. Better, he said, to “ease the regulatory burden and restrictions on the development of businesses, thereby injecting more vitality into our economy.”
Prof. Yu pointed to small and medium-sized manufacturers, which have “faced the most difficulties and are therefore most in need of help.” He said “a massive stimulus program is a must.”
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