Is lockdown easing a false hope?

<p>China’s GDP fell sharply in the first quarter of 2020 compared with the same period of last year, while signs of recovery in March are highly uneven. Post-virus China recovery in March is, in a sense, a useful leading indicator for other countries: if the strict rules of social distancing are in place, a V-shaped rebound, particularly in consumption, is unlikely to happen.</p>
<p>The aggregate output in the economy fell by 6.8% compared to the same period last year. The last time an economic downturn dealt such a huge blow to the country was in 1967; when China was an underdeveloped, predominantly agrarian country gripped by the Cultural Revolution. Even then, the fall in GDP was 5.8%. March activity did not smooth the overall dynamics for the first quarter due to partial lockdowns in some regions and the need to avoid close contact with people. This greatly slows down the recovery of the service sector and depresses consumer confidence.</p>
<p>Investment fell by 16.1% in the first quarter of 2020 but grew by 6.05% separately in March. The data showed that the growth of capital investments was not concentrated in individual sectors. This means that the private sector partially shared the burden of investing with the state, which in turn indicates some rebound in the business climate and effects of lower interest rates.</p>
<p>Industrial production fell 8.4% in the first quarter, but the factories caught up some of the lost output, when production fell by only 1.1% compared to March 2020. Quarantine hit car and parts manufacturers hard with output in the industry falling by 43%. Since all efforts were devoted to the fight against Covid-19, the industries working for the crisis grew up quite well:</p>
<ul>
<li>Output of masks and protective clothing grew by 6.1% YoY.</li>
<li>Medicines by 4.5%.</li>
<li>Telecommunications and robot manufacturing grew by 9.9% and 12.9% respectively, due to the active support of the government.</li>
</ul>
<p>The weakest link in the economy was retail sales, which failed to rebound significantly in March. The fall was 19% in January-February, and 15.8% in March, which is expressed in consumer deflation despite the weakening of quarantine:</p>
<p><img class="alignnone size-full wp-image-41986" src="http://blog.tickmill.com/wp-content/uploads/2020/04/1-19.png" alt="" width="628" height="360" srcset="https://blog.tickmill.com/wp-content/uploads/2020/04/1-19.png 628w, https://blog.tickmill.com/wp-content/uploads/2020/04/1-19-300×172.png 300w" sizes="(max-width: 628px) 100vw, 628px" /></p>
<p>In March, the only consumption category except food that rebounded was telecommunication equipment. Spending on clothes, furniture and cars remained severely depressed even in March (-34.8%, -22.7%, -18.4% YOY in the three categories). High-frequency data on car traffic in major cities in China show that the Chinese prefer to spend their days off at home despite the removal of quarantine, which curbs discretionary purchases:</p>
<p><img class="alignnone size-full wp-image-41987" src="http://blog.tickmill.com/wp-content/uploads/2020/04/2-15.png" alt="" width="628" height="409" srcset="https://blog.tickmill.com/wp-content/uploads/2020/04/2-15.png 628w, https://blog.tickmill.com/wp-content/uploads/2020/04/2-15-300×195.png 300w" sizes="(max-width: 628px) 100vw, 628px" /></p>
<p>The economy will receive some support from the government’s implementation of the New Infra project, for which they are planning to spend 1.1 trillion RMB, raised through the issuance of municipal bonds. The optimism on this initiative is hampered by the fact that even if the local government can raise funds, it will not be possible to implement projects efficiently and quickly because of strict measures to limit social contacts and keep social distancing.</p>
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