BEIJING (Reuters) – China is expected to report a sharp deterioration in economic activity in March as COVID-19 outbreaks and shutdowns hit consumers and factories, although growth in the first quarter may have stalled due to a strong start to early the year.
Data on Monday are expected to show that gross domestic product (GDP) grew 4.4 in January-March from a year earlier, according to a poll by Reuters, which exceeded the fourth quarter 4.0% pace due to a surprisingly solid start in the first two months.
But on a quarterly basis, GDP growth is expected to fall to 0.6% in the first quarter from 1.6% in October-December, the poll showed, pointing to a cooling momentum.
Separate data on March activity, particularly retail sales, are likely to show an even sharper slowdown, say analysts, hit hard by China’s strenuous efforts to curb its biggest COVID outbreak since coronavirus was first detected in the city of Wuhan in late 2019. .
Analysts say April readings are likely to get worse, with lockdowns in commercial downtown Shanghai and elsewhere pulling out. Some economists say the risk of a recession is rising.
The government will publish the figures for the first quarter and March on Monday at 0200 GMT, where investor speculation is rising about whether there will be more measures to stimulate the economy.
Late Friday, China’s central bank said it would cut the amount of cash that banks will hold as reserves for the first time this year, releasing about 530 billion yuan ($ 83.25 billion) in long-term liquidity.
The move was largely expected after the cabinet or cabinet on Wednesday said monetary policy tools – including cuts in banks’ reserve requirements (RRRs) – should be used in a timely manner.
Politicians must ensure that nothing goes wrong before a meeting twice a year in the ruling Communist Party in the autumn, with President Xi Jinping almost certain to secure a precedent-breaking third term as leader, political insiders said.
But Beijing’s strict zero-tolerance policy towards COVID-19 is taking an increasing toll on the world’s second largest economy and is starting to disrupt supply chains globally ranging from cars to iPhones.
“In the run-up to the party congress, we believe the central bank will prioritize growth, especially as the COVID battle drags on and the housing markets do not recover,” analysts at Barclays said in a note.
Retail sales, a measure of consumption that has lagged since COVID-19 first hit, were likely to fall 1.6% in March from a year earlier. That would be the worst result since June 2020, reversing an increase of 6.7% in the first two months, the poll showed.
Industrial production was likely to grow 4.5% in March from a year earlier, falling from 7.5% in the first two months, while investment in fixed assets may have grown by 8.5% in January-March, falling from 12, 2% in the first two months.
Reuters poll predicts China’s growth will slow to 5.0% by 2022, suggesting the government is facing an uphill battle to reach this year’s target of around 5.5%.
Barclays estimates that second-quarter GDP growth could fall to 3%, pulling growth to 20% in 2022 if Shanghai’s extended shutdown were to last for a month and partial shutdowns in the rest of the country remained in place for two months.
As a result of a weakening of domestic demand and COVID-related logistics snare, China’s imports fell in March, while exports – the last major driver of growth – show signs of fatigue.
The government has unveiled several fiscal stimulus this year, including increased local bond issuance to fund infrastructure projects and reduce corporate taxes.
But analysts are not sure whether interest rate cuts would do much to halt the economic downturn in the short term, as factories and businesses struggle and consumers remain cautious about spending. More aggressive easing may also trigger capital outflows and put more pressure on Chinese financial markets.
“I do not think this RRR cut (on Friday) means that much to the economy at the moment,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting that it was smaller than markets had expected.
“The biggest challenge facing the economy is the Omicron outbreaks and lockdown policies that limit mobility. More liquidity can help margins, but that does not solve the root of the problem. Manufacturers face the daunting risk of supply chain disruptions.
“Unless we see effective policies to address the mobility problem, the economy will slow down. I expect second-quarter GDP growth to be negative.”
(Reporting by Kevin Yao; Editing by Kim Coghill)