China data to show sharp decline in March as COVID bites, but solid Q1 growth

China is expected to report a sharp deterioration in economic activity in March as COVID-19 outbreaks and lockdowns hit consumers and factories, although first-quarter growth may have strengthened due to a strong start to beginning of the year.

Data on Monday is expected to show gross domestic product (GDP) grew 4.4% in January-March from a year earlier, a Reuters poll showed, beating the fourth quarter’s 4% pace due to a start surprisingly solid in the first two months.

But on a quarterly basis, GDP growth is forecast to fall to 0.6% in the first quarter from 1.6% in October-December, the survey showed, pointing to a cooling of momentum.

Separate data on March activity, especially retail sales, is likely to show an even sharper slowdown, analysts say, hit hard by China’s stringent efforts to contain its biggest COVID-19 outbreak since the virus was discovered. coronavirus for the first time in the city of Wuhan in late 2019. .

Analysts say April readings are likely to be worse, with lockdowns at the Shanghai mall and elsewhere dragging on. Some economists say the risks of a recession are rising.

The government is to publish figures for the first quarter and for March on Monday at 2 am GMT, as investor speculation mounts over whether there will be more measures to stimulate the economy.

Late on Friday, China’s central bank said it would reduce the amount of cash banks must hold as reserves for the first time this year, freeing up about 530 billion yuan ($83.25 billion) in long-term liquidity.

The move was largely expected after the State Council, or Cabinet, said on Wednesday that monetary policy tools, including cuts in banks’ reserve requirement ratios (RRRs), should be used in a timely manner. .

Policymakers need to make sure nothing goes wrong ahead of a twice-decade meeting of the ruling Communist Party in the fall, when President Xi Jinping is almost certain to get an unprecedented third term as leader, policy experts say.

But Beijing’s strict zero-tolerance policy on COVID-19 is increasingly taking a toll on the world’s second-largest economy and beginning to disrupt supply chains globally, from cars to iPhones.

“In the run-up to the Party Congress, we believe the central bank will prioritize growth, especially as the battle against COVID-19 drags on and property markets fail to recover,” Barclays analysts said in a note.

Retail sales, a gauge of consumption, which has been lagging since the first hit of COVID-19, probably shrank 1.6% in March from a year earlier. That would be the worst result since June 2020, reversing a 6.7% rise in the first two months, the survey showed.

Industrial production likely grew 4.5% in March from a year earlier, a 7.5% slowdown in the first two months, while fixed asset investments may have risen 8.5% in January-March, a slowdown of 12.2% in the first two months.

The Reuters poll forecast China’s growth to slow to 5% in 2022, suggesting the government faces an uphill battle to hit this year’s target of around 5.5%.

Barclays estimates that second-quarter GDP growth could fall to 3%, dragging 2022 growth to 4.2%, if Shanghai’s extended lockdown lasted for a month and partial lockdowns in the rest of the country lasted for two months. .

Reflecting weakening domestic demand and logistical issues related to COVID-19, China’s imports contracted in March, while exports, the last big driver of growth, show signs of fatigue.

The government has introduced more fiscal stimulus this year, including increasing local bond issuance to finance infrastructure projects and cutting taxes for businesses.

But analysts aren’t sure whether rate cuts would do much to stem the economic downturn any time soon, as factories and businesses struggle and consumers remain cautious about spending. More aggressive easing could also trigger capital outflows, putting further pressure on Chinese financial markets.

“I don’t think this RRR cut (on Friday) matters that much for the economy at this stage,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting it was smaller than markets expected.

“The main challenge facing the economy is omicron outbreaks and lockdown policies that restrict mobility. More liquidity may help at the margin, but it doesn’t address the root of the problem. Manufacturers face the huge risk of supply chain disruptions.” of supply.

“Unless we see effective policies to address the mobility problem, the economy will slow down. I expect GDP growth in the second quarter to turn negative,” Zhiwei said.

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