China data shows sharp deterioration from March as COVID bites but solid Q1 growth

© . FILE PHOTO: Workers watch as a crane lifts a structure at a construction site in Shanghai, China Jan. 14, 2022. REUTERS/Aly Song By Kevin Yao BEIJING () -China is expected to report a sharp deterioration in economic activity in March as Outbreaks and lockdowns of COVID-19 are hitting consumers and factories, although growth may have picked up in the first quarter as a result of a strong start early in the year. Monday’s data shows gross domestic product (GDP) grew by 4.4 in January-March from a year earlier, a poll showed, faster than the 4.0% pace in the United States. fourth quarter, thanks to a surprisingly solid start in the first two months. But on a quarterly basis, GDP growth is expected to decline to 0.6% in Q1 from 1.6% in October-December, the poll found, pointing to a cooling momentum. Separate data on March activity, particularly retail sales, is likely to show an even sharper slowdown, analysts say, hit hard by China’s strenuous efforts to contain the largest COVID outbreak since coronavirus first emerged was discovered in the city of Wuhan in late 2019. Analysts say readings are likely to be worse in April, with lockdowns in the commercial center of Shanghai and elsewhere. Some economists say the risks of a recession are increasing. The government is expected to release Q1 and March figures on Monday at 0200 GMT, as investor speculation mounts as to whether more steps will be taken to stimulate the economy. Late Friday, China’s central bank said it would reduce the amount of cash banks must hold as reserves for the first time this year, freeing up about 530 billion yuan ($83.25 billion) in long-term liquidity. The move was largely expected after the State Council, or cabinet, said on Wednesday that monetary policy tools — including cuts in banks’ reserve requirement ratios (RRRs) — should be used in a timely manner. Policymakers should make sure nothing goes wrong before a twice-decade meeting of the ruling Communist Party in the fall, when President Xi Jinping will almost certainly secure a precedent-breaking third term as leader, policy insiders said. But Beijing’s strict zero-tolerance policy on COVID-19 is taking an increasing toll on the world’s second-largest economy and is beginning to disrupt supply chains worldwide, ranging from cars to iPhones. “Ahead of the party conference, we believe the central bank will prioritize growth, especially as the COVID battle continues and housing markets fail to recover,” Barclays (LON:) analysts said in a note. Retail sales, a measure of consumption that has lagged since COVID-19 first hit, is likely to contract 1.6% in March from a year earlier. That would be the worst showing since June 2020, up 6.7% in the first two months, the poll shows. Industrial production is likely to grow 4.5% year-on-year in March, slowing by 7.5% in the first two months, while fixed asset investment may grow 8.5% in January-March have increased, from 12.2% in the first two months. The survey forecast that China’s growth will slow to 5.0% in 2022, suggesting the government faces an uphill battle to meet its target of around 5.5% for this year. Barclays estimates GDP growth could fall to 3% in the second quarter, pushing growth to 4.2% in 2022, if Shanghai’s extended lockdown lasts a month and partial lockdowns throughout the rest of the year. country would remain in force for two months. As a result of weakening domestic demand and COVID-related logistics snap, Chinese imports shrank in March, while exports – the latest major growth engine – are showing signs of fatigue. The government has announced more fiscal stimulus this year, including ramping up local bond issuance to fund infrastructure projects and lowering corporate taxes. But analysts aren’t sure if interest rate cuts will do much to stop the economic slump in the near term, as factories and businesses struggle and consumers remain cautious about spending. More aggressive easing could also lead to capital outflows, putting more pressure on Chinese financial markets. “I don’t think this RRR cut (on Friday) makes that much of a difference to the economy at this stage,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting it was less than markets had expected. “The biggest challenge facing the economy is Omicron’s outbreaks and lockdown policies restricting mobility. More liquidity can help at the margins, but it won’t get to the root of the problem. Manufacturers run the huge risk of supply chain disruptions.” Unless we see effective policies to address the mobility problem, the economy will slow down. I expect GDP growth to turn negative in the second quarter.”

Leave a comment