Covid has hit China’s economy harder than expected

The world’s second-largest economy reported shocking declines in retail sales and factory production, largely missing market expectations.

Retail sales plunged 11.1% in April from a year ago, according to China’s National Bureau of Statistics on Monday. That was well below the 6.1% drop predicted in a Reuters survey of economists, and also well below the 3.5% drop seen in March.

Industrial production fell 2.9% last month from a year earlier, reversing a 5% gain in March.

It is the worst contraction in industrial production since February 2020, when China’s economy came to a virtual standstill during the first coronavirus outbreak.

Unemployment has also reached the second highest level on record.

The urban unemployment rate hit 6.1% in April, down from 5.8% in March – which was already at its highest level in 21 months. The only time China’s unemployment rate was higher was in February 2020.

Young people are struggling to find jobs, the data shows, with the unemployment rate for 16-24 year olds hitting 18.2%, the highest on record.

Rising unemployment is a wake-up call for the ruling Communist Party given the risk of social and political instability.

“After all, zero Covid at the cost of soaring unemployment is a politically tough sell,” said Larry Hu, chief China economist at Macquarie Capital.

The government expects the economy to rebound this month.

“Economic performance” in May will improve, BES spokesperson Fu Linghui said Monday.

“As epidemics are brought under control and people’s lives return to normal, pent-up consumption will be gradually released,” he said.

Increased investment in infrastructure projects will also support the recovery, he added.

Hard blow

The Chinese economy had gone to a solid start in 2022, registering a growth of 4.8% for the first quarter.
But Beijing’s efforts to rein in its worst Covid outbreak in two years have dealt a major blow to activity since March, and economists now expect GDP to contract this quarter.
So far, at least 31 cities across the country remain under full or partial lockdown, according to CNN’s latest calculations. Shanghai, the country’s financial center and a manufacturing center, has been in containment since more than six weeks. During this period, many companies have been forced to suspend their activities, including car manufacturers You’re here (TSLA)and volkswagen (VLKAF) and the Pegatron iPhone assembler.

“We think second-quarter GDP growth is likely to turn negative,” Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, said Monday.

“The government is facing increasing pressure to launch new stimulus measures to stabilize the economy,” Zhang said.

Chinese leaders are aware of the economic difficulties and have recently taken steps to provide relief.

The People’s Bank of China announced on Sunday that it would cut the mortgage rate for first-time home buyers, in a bid to turn around the struggling property market.

Separately, the Shanghai government said the city will gradually open shops, restaurants and salons from Monday, which will be a relief for its 25 million residents.

The government has also recently pledged to support the economy with more infrastructure spending and targeted monetary easing to support small businesses.

Monday’s data showed investment in the manufacturing sector was up 12.2% from a year ago. Investments in infrastructure, meanwhile, increased by 6.5%.

But “risks to the outlook are on the downside, as the effectiveness of stimulus measures will largely depend on the magnitude of future Covid outbreaks and shutdowns,” said Tommy Wu, chief economist for the China at Oxford Economics.

“We expect GDP growth of 4% this year, with a quarterly contraction in the second quarter before returning to growth in the second half.”

— CNN’s Beijing bureau contributed to this report.

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