How soon will economies recover from the coronavirus pandemic? Look to China for answers

Going by China’s experience, it could take countries over three months after lockdown restrictions are eased to get their economies back on track. Economic activity could return to normal levels by the last quarter of 2020

Hao Zhou

Published: 9:30am, 6 May 2020

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How will the Covid-19 pandemic affect the world’s economies? Given that China was the first country to impose stringent lockdown measures, and also the first to lift them, an examination of China’s data could help us understand the impact of the coronavirus if one takes a sectoral approach.

After all, the service sector seems to be hit harder and for longer. Unfortunately, the sector is in for a slow and fragile recovery.

First, let’s take a look at China’s first-quarter gross domestic product report by sector, which reveals a clear split. While most sectors – particularly hotel and catering – saw a plunge, the finance and information technology sector reported positive annual growth. The outperformance of IT is clearly due to the surge in online shopping and huge demand for cloud services as many people needed to work from home.

However, the positive growth of the finance sector, which largely comprises the banking sector, is because the government has taken a countercyclical approach and encouraged financial institutions to support virus-hit corporations.

Next, let’s dive a bit deeper into consumption, which accounts for almost 60 per cent of China’s economy. While food consumption grew sharply during the coronavirus outbreak, discretionary consumption, including cars, jewellery and catering, reported at least a 30 per cent drop in the first three months of 2020.

Following this logic, the developed regions of the country, where discretionary spending plays a bigger role in the economy, will be hit harder by the Covid-19 crisis.

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In terms of investment profile, property investment continues to outperform overall fixed-asset investment, which suggests that property demand is still holding up, as most investment in the housing sector is conducted by non-state companies.

In fact, housing sales in China had more or less recovered by mid-April, which also seems counterintuitive, given that long-term investment, such as housing, should recover at a slower pace amid the rising uncertainties.

While we still need more data and time to assess the property market dynamics, this at least suggests that a property slowdown, as feared by many, is not an immediate risk to the already fragile economy.

A woman gazes at apartment blocks near Luoyang Longmen high-speed railway station, in an area that was once rural farmland, in Luoyang, Henan province, in September 2014. Photo: Getty Images

As China gradually resumes economic operations after lifting travel restrictions, the pace of recovery has varied across sectors. The manufacturing sector has recovered much more rapidly than certain service industries – industrial production saw a V-shaped recovery while retail sales showed a significant drop.

On a seasonally adjusted basis, industrial production climbed by 32 per cent month on month in March, while retail sales only gained 0.24 per cent that month.

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Power consumption data highlights a more comprehensive but also worrisome trend in the service sector. Overall electricity utilisation in the service sector declined by 8.3 per cent in the first quarter of 2020; however, a 19.8 per cent drop was recorded in March alone, even worse than the 10 per cent decline in February. This indicates that there has been little improvement in consumption even after the lockdown measures were lifted.

Obviously, fears related to Covid-19 remain a big drag on consumption and related service industries. As certain social distancing measures will remain in place for a while, there is little hope of a rapid recovery in the Chinese service sector, which has played a prominent part in the economy for the past five years.

People wearing protective masks walk through a shopping district in Beijing on March 25. There has been little improvement in consumption since China lifted lockdown measures. Photo: Reuters

Last but not least, almost every indicator, including purchasing managers’ indices, industrial production and fixed-asset investment, points to a much slower recovery path for private companies than state firms. For instance, the official composite PMI entered expansionary territory in March, but the Caixin PMI, a reflection of private-sector performance, was still below 50 and 6.3 points lower than the official PMI figure.

The disparity in the performance of state and non-state sectors also reflects China’s economic characteristics: state-owned companies usually get more support from the government. Unfortunately, many private firms and small family businesses may have already disappeared quietly.

These findings suggest that the Chinese economy has not yet fully recovered, with consumption, services and the private sector still far from normal levels. The economy is unlikely to return to normalcy before the third quarter of 2020.

A man walks past a closed shop in Beijing on April 5. The catering industry was one of the worst performers in the first quarter. Photo: AFP

Reading China as a case study suggests that global economic recovery is a long way off, although many countries are starting to consider easing lockdown restrictions.

For countries where the lockdown is set to be lifted late in the second quarter, if China’s experience is any indication, it could take over three months to get the economy back on the path to normalcy. This suggests economic activity could return to normal levels as soon as in the last quarter of 2020.

In China, one thing is clear: policy aid will continue until the economy is back on track. The government is likely to focus on reviving domestic consumption and preventing a slump in jobs, further extending the manufacturing recovery via infrastructure spending, and promoting the private sector through a targeted relief package.

Hao Zhou is senior emerging markets economist at Commerzbank

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