China’s economy hit hard by response to coronavirus
China’s economy looks set to contract sharply in Q1 as a result of its response to the coronavirus. GDP figures will not be released until April, but the data available so far points to a significant downturn. While Wuhan was in lockdown, the rest of the country largely stayed at home. The effects of those measures are now being felt on each of the components that make up GDP.
For the year to date, retail sales have fallen by 20.5 percent, fixed asset investment by 24.5 percent and exports by 15.9 percent. Meanwhile, imports fell by just 2.4 percent meaning there will be a very negative impact on net exports.
Further evidence comes from surveyed unemployment, which has risen from 5.2 percent in December to 6.2 percent today - the highest number on record. Manufacturing and non-manufacturing Purchasing Managers’ Index are also down, from 50 and 54 respectively, to 35.7 and 29.6. Any number below 50 in PMI indicates a contraction.
However, the clearest indicators of all that the slowdown is real - and the ones that best capture the big picture - are air pollution and electricity consumption. Satellite images show Chinese air pollution has fallen drastically, and latest figures reveal that electricity consumption has fallen by 10.1 percent, indicating economic activity is severely reduced.
The only part of the Chinese economy that has apparently not been severely impacted is the stock market. But given that there has been around a 20 percent fall in economic activity, this reflects not so much underlying reality, as the fact that the government has intervened heavily to defend asset prices.
China now has to restart its economy quickly. Many fixed costs such as rent and mortgage payments will not be met if companies and individuals lose their income. This will not be easy, however. China was already financially rather shaky before the corona crisis hit, and it now faces the added challenge that the virus has spread to the rest of the world. With consumption decreasing around the globe, China’s exports sector will struggle to get back on its feet. In 2019, net exports were an important contributor to China’s economic growth.
For Europe, which to some extent is copying China’s response to the crisis with severe social distancing, restrictions and closures, the economic costs in China give an indication of the scale of the impact these measures could have on its economy.