China reported its biggest decline in consumer spending and worst unemployment rate since the early months of the pandemic as Covid lockdowns put a strain on the world’s second-largest economy, adding another threat to global growth.
The figures for March came alongside a stronger-than-expected acceleration in gross domestic product growth in the first quarter to 4.8%, an outcome that doesn’t capture the full extent of the economic damage from Covid lockdowns in financial and trade hub Shanghai and other places from the middle of last month. Some economists also questioned the strength of the data.
Retail sales contracted in March for the first time since 2020, falling 3.5% from a year ago. The surveyed jobless rate climbed to 5.8%, the highest since May 2020.
With outbreaks showing no signs of ending and President Xi Jinping doubling down on his strict Covid Zero approach, the economy is in for more pain in the second quarter and supply chains will likely remain stressed. That adds another major risk to a global economy already facing slowdown as central banks in major economies rush to hike interest rates to combat soaring inflation and the ongoing war in Ukraine pushes up commodity prices. “
March was bad and April will be worse,” said Chen Long, an economist at Beijing-based consultancy Plenum. “Those countries relying on demand from Chinese investment and production will suffer in the second quarter.”
Shanghai’s lockdown confined most of its 25 million population to their homes since March and halted production at factories owned by Tesla Inc. and others. A total of 45 cities are now imposing partial or total lockdowns, Nomura Holdings Inc. estimated last week, impacting some 370 million people. Industrial hubs in eastern China have imposed tight controls, forcing manufacturers like iPhone assembler Pegatron Corp. to shut production.
Fu Linghui, a spokesman of the National Bureau of Statistics, said employment pressure increased last month due to restricted industrial production and declining demand for services amid Covid outbreaks. The economy is “facing significant difficulties and challenges,” he told reporters in Beijing on Monday.
The surge in the jobless rate will have an impact on the economy in the longer term, as employment supports activities from production to consumption,” said Liu Peiqian, China economist at NatWest Group Plc.
China’s benchmark CSI 300 Index traded 0.6% lower as of 2:09 p.m. local time, paring losses of as much as 1.6% before the data were released. Bonds also retreated, with the futures contracts of 10-year sovereign notes dropping 0.4%.
What Bloomberg Economics Says
Forget the first-quarter GDP data showing a pickup in growth -- the March activity data tell the real story: China’s economy is in the worst shape it’s been since early 2020 when the pandemic first slammed growth. A sharp deceleration in production and tumble in retail sales in March underline the initial damage from Covid-19 lockdowns in major cities including Shanghai. April’s data will probably reveal more weakness.
Despite the stronger-than-expected GDP data, China’s annual target of about 5.5% growth has become increasingly challenging to achieve. Economists expect the Covid lockdowns and other risks to drag GDP growth down to 5% this year. DBS Group Holdings slashed its full-year forecast by 50 basis points to 4.8% after the data.
Some economists questioned the upbeat figures, with the NBS painting a more positive picture of key sectors, such as real estate sales and investment in infrastructure, than data from independent sources show.
Infrastructure investment expanded 8.5% in the first quarter, the NBS said, even though higher frequency data on excavator usage showed a year-on-year contraction in activity over that period. Some of the official data also appeared inconsistent, such as a rise in investment in the first quarter while production of steel and cement fell more than 10%.
“It’s hard to understand the case for an acceleration in growth” said Logan Wright, director of China markets research at consultancy Rhodium Group. “Either a sudden surge in high-tech manufacturing investment or stronger consumption growth despite Covid restrictions was enough to completely offset the impact of a contracting property sector, and neither of those explanations appears very plausible.”
The statistics bureau said real estate sales fell 29% in March from a year ago, compared with a nearly 50% decline reported by the hundred largest property developers. “There’s a quite big gap between the real estate resilience as shown in the data and on-the-ground feeling of the market,” said Jacqueline Rong, deputy chief economist for China at BNP Paribas SA.
Spending at restaurants plunged more than 16% in March from a year ago, partly due to the higher base of comparison from last year, but also a sign that consumers are either unable or unwilling to spend. There were also sharp declines in expenditure on clothing, jewelry and furniture.
The rapid deterioration in the growth outlook has caught Beijing off guard. Top leaders have issued frequent warnings about economic growth in the past week and pledged stronger monetary and fiscal stimulus to shore up the economy. On Friday, the central bank said it would lower the reserve requirement ratio for most banks by 25 basis points, but signaled that overall easing will be limited as it refrained from cutting interest rates and injecting liquidity into the economy.
Official efforts to restart production and unclog logistics have also accelerated in recent days amid increasingly vocal complaints from high-profile entrepreneurs, foreign diplomats and business representatives. Shanghai published plans over the weekend to resume work in the city, requiring companies to apply for approval with so-called closed-loop management designs, in which employees were kept at factory locations and tested regularly. The most important question facing China’s economy is when officials can bring the Covid outbreaks under control and relax lockdown measures, economists say.
We think these fiscal and monetary policy supports are not enough to fill the gap of GDP loss from lockdowns,” said Iris Pang, chief economist for Greater China at ING Greop NV. “GDP loss will increase exponentially with duration of lockdown.”