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China's economy suffers heavy blow as epidemic paralyses activity

Reuters | Updated: 16-03-2020 07:59 IST | Created: 16-03-2020 07:59 IST
China's economy suffers heavy blow as epidemic paralyses activity

China's industrial output contracted at the sharpest pace in 30 years in the first two months of the year as the fast spreading coronavirus and strict containment measures severely disrupted the world's second-largest economy, data showed on Monday. Urban investment and retail sales also fell sharply and for the first time on record, reinforcing views that the epidemic may have cut China's economic growth in half in the first quarter.

Industrial output fell by a much more than expected 13.5% in January-February from the same period a year earlier, the weakest reading since January 1990 when Reuters record started, and a sharp reversal from 6.9% growth in December, data from the National Bureau of Statistics (NBS) showed. The median forecast of analysts polled by Reuters was for a rise of 1.5%, though estimates varied widely.

Fixed asset investment fell 24.5% year-on-year, compared with 2.8% predicted by analysts and 5.4% growth in the prior period. Retail sales shrank 20.5% on-year, compared with a rise of 0.8% tipped by analysts and skidding from 8% growth in December as consumers fearful of the virus shunned crowded places like shopping malls, restaurants and movie theatres.

Chinese officials said last week that the peak of the epidemic had passed, but analysts warn it could take months before the economy returns to normal. The fast spread of the virus around the world is sparking fears of a global recession that will dampen demand for Chinese goods. The NBS in a statement on Monday said the impact from the coronavirus epidemic is controllable and only short-term and authorities would strengthen policy to offset the impact and restore economic and social order.

Mainland China reported an overall drop in new coronavirus infections on Sunday, but major cities such as Beijing and Shanghai continued to wrestle with cases involving infected travellers arriving from abroad. Prior to a significant deterioration in the virus, analysts had predicted a rapid V-shaped recovery for China's economy, similar to that seen after the SARS epidemic in 2003-2004.

However, the outbreak escalated just as many businesses were closing for the long Lunar New Year holidays in late January, and widespread restrictions on transportation and personal travel, as well as mass quarantine, delayed their reopening for weeks. The Caixin Purchase Manager's Index, a private measure of factory activity, plunged to the lowest on record in February, with production and new orders collapsing and signs of hefty layoffs. Shortages of Chinese-made parts and components rapidly rippled through global supply chains as far away as Europe and the United States.

China's exports fell 17.2% in the first two months from a year earlier, while slumping demand pushed producer prices back into deflation, recent data showed. Factories may not be back to full output until April, some analysts estimate, and consumer confidence may take even longer to recover. Authorities are now on the watch for Chinese nationals who may bring the virus home from other parts of the world.

Citing the twin blow from both supply and demand shocks, analysts polled by Reuters expect China's first-quarter economic growth could be cut nearly in half to 3.5% year-on-year from 6% in the previous quarter. Some suspect the economy even contracted on a quarter-on-quarter basis. For the year, growth was expected to slow to 5.4%, which would be the slowest since 1990.



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