China Reports Unprecedented GDP Contraction. And March Activity Data Reveals A Troubling Divergence

China reported an unprecedented contraction in economic output on Friday, making official what everyone already knew.

GDP shrank 6.8% in the first quarter, more than the 6% economists anticipated. It was the first contraction since at least 1992.

The range of estimates was wide. The most pessimistic projection saw a 16% decline, while one lonely optimist was looking for 3.6% growth.

While the notion of Beijing acquiescing to an outright decline in overall economic activity would have seemed laughable a mere three months ago, the draconian character of the lockdown measures imposed to halt the spread of COVID-19 left officials with little room to maneuver.

China is as adept as anyone when it comes to massaging the data, but nobody is that adept – or at least nobody who’s interested in preserving any semblance of credibility on the world stage.

Concurrent with the hotly-anticipated GDP data, Beijing released March activity numbers. They were mixed, although it’s not clear that’s the best adjective.

Activity data for February betrayed a comically disastrous plunge in retail sales, industrial output and fixed investment. Retail sales weren’t much better in March. The market was looking for a 10% decline and got a 15.8% drop instead. The range was -25% to +5%.

On the bright side, industrial production rebounded sharply, from a 13.3% slide in February, to just to a 1.1% decline in March. That’s much better than the 6.2% drop consensus expected and is perhaps indicative of the frantic effort to bring factories back online following a dramatic shut-in during the worst days of China’s epidemic.

Fixed investment came in slightly below expectations at -16.1% YoY (and that’s a cumulative number – January through March).

The surveyed jobless rate dropped to 5.9% from 6.2%.

One immediate takeaway is that while you can “flip the switch” on industry, you cannot do the same for the services economy. That is, you can’t force people to go out to eat, or to get coffee from a vendor when they can make a pot at home. It would be a stretch to read too much into the discrepancy between China’s better-than-expected IP data for March and the lackluster retail sales print, but if that trend continues, it won’t bode well for Europe or for the US.

As for what the future holds for overall economic activity in China – or, more to the point, for the headline GDP print – you can expect things to rebound. Reporting a deep contraction was surely a painful exercise for the Party, and you can bet they won’t be keen on doing it again.

In that regard, remember that in the Chinese context, “Whatever it takes” isn’t just policy bravado for the sake of instilling confidence in markets. If China adopts some form of Mario Draghi’s famous crisis slogan, the Party will mean it literally.


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