China has unveiled a rash of horrific data, further hammering markets after the Fed’s emergency rate cut set panic amongst investors worried about the empty monetary tool kit were the coronavirus crisis to worsen.
China’s fixed asset investments in the January February period contracted 24.5%, a fall much steeper than the estimated 2% forecast. The country’s industrial output in the first two months of the year dropped 13.5%, falling more speedily than the -3% forecast, and retail sales plunged 20.5%, worse than the forecast contraction of 4%.
“The latest activity and spending data were much weaker than expected and point to a far deeper downturn than during the Global Financial Crisis. While domestic conditions should improve slowly in the coming months, the mounting global disruption from the coronavirus will hold back the pace of recovery,” said Julian Evans-Pritchard, Senior China Economist at Capital Economics.
Evans-Pritchard had previously assumed that the statistics bureau would be reluctant to fully acknowledge the recent weakness as doing so would make official GDP targets unreachable, but the contraction was worse than anticipated and therefore the prognosis becomes gloomier.
Not everyone was surprised by the data, as fears of what lay ahead is forcing recalibrations of forecasts.
“The actual shock could be much bigger than those deeply negative January-February numbers suggest, because the lockdowns started only from 23 January. Given the relatively slow resumption rate (around 70% at the moment), we expect negative growth for all activity data in March too, though these will likely be less negative,” said Ting Lu, a Nomura economist, who said Monday’s data release was in line with his expectations.
Nomura now forecasts growth in Q1 would likely be negative, worse than the 0.0% forecast made earlier.
The road ahead suggested a slow pace of recovery even if the spread of the virus stabilizes in China as consumer spending would take a hit on the back of the rise in unemployment and exports would be constrained by the global spread of the virus.
“GDP is now almost certain to contract in 1Q. Fixed investment the hardest hit in the first two months of the year given restrictions on construction and shortages of migrant workers. Retail sales also registered the first contraction in history as people were confined to their homes,” said Nathan Chow, strategist at DBS Bank.
Although there have been improvements in the current month as suggested by data from coal consumption to electricity usage and transport volume, which showed an uptick, the economy was still operating at a far below capacity.
“Beijing will likely roll out more fiscal and monetary stimulus to spur the economy. On top of the RRR cut today, we expect the PBOC to lower the LPR by another 10bps to 3.95% this Friday,” said Chow.