China — Domestic demand slumps on COVID-19 disruption

Industrial output, investment and retail sales posted year-over-year contractions in January-February for the first time since data became available in the 1990s as the COVID-19 virus halted economic activity (Chart). Urban unemployment also rose from 5.2% to 6.2%. Many institutions, including the OECD, have revised down their China GDP growth forecasts below 5% for 2020, from previous estimates of around 6%.

As containment measures block the movement of people, consumer spending on transportation, retail, tourism and entertainment has suffered. Supply chains have also been disrupted, as factories shut and workers are quarantined, hurting production of many goods including electronics, vehicles, toys and clothing.

The central bank has added monetary stimulus, including cutting lending rates, to support growth and liquidity. A modest general government debt burden around 40% of GDP provides the government scope to absorb the economic and fiscal shock. The fiscal response has focused on relief for businesses in the form of delays to taxes, utility tariffs, and welfare system contributions. Provincial governments are enacting specific measures in addition to those from the central government, including commercial rent waivers and VAT relief. Banks are also being guided to provide debt servicing relief for stressed borrowers.

Authorities are unlikely to pursue significant stimulus measures, like they did in 2008-09, for fear of stoking financial stability risks. A further buildup in leverage would add to an already very high non-financial corporate debt burden (160% of GDP in Q3 2019) at a time when slowing GDP growth weighs on corporate revenues. That could prompt further bond defaults.

Chinese officials have indicated the peak of the epidemic has passed, and the economy is gradually recovering. But the fast spread of the virus around the world is likely to negatively impact Chinese consumer confidence, as well as plunge the global economy into recession. That will further dampen demand for Chinese goods and services, and threaten to stymie the recovery.