Covid-19: Prospects for Chinese economic recovery still very uncertain, says FGV IBRE researcher
The signs of stabilization of the first wave of coronavirus contagion in China, although positive, are insufficient to improve the range of estimates of the deterioration in Chinese economic activity this year or provide a picture of the expected recovery, wrote Livio Ribeiro, an applied economics researcher at the FGV`s Brazilian Institute of Economics (FGV IBRE), in an article in The Brazilian Economy Magazine.
To illustrate this degree of uncertainty, Ribeiro examined three possible recovery scenarios: a “rapid V-shaped recession,” in which the shock is concentrated in the first quarter, followed by a return to the normal pace of growth; a “long V-shaped recession,” in which the shock lasts two quarters, followed by the resumption of normal growth; and a “U-shaped recession,” with the shock lasting until the end of 2020, and stronger signs of recovery only appearing in 2021. He also calibrated the results in line with the performance of economic activities observed in the first two months, projecting two other scenarios, the same or more benign, for March.
“This exercise resulted in changes in GDP in 2020 ranging from +2.7% to -11.3%. The range is very large,” Ribeiro said, reinforcing the difficulty in making estimates at the present moment.
In the first two months of this year, all 41 industrial sectors in China posted negative results, except oil refining and nuclear materials. The shock in activity was not concentrated in Hubei, the epicenter of the crisis, but affected all 31 Chinese provinces. Service sector activity indicators in the country (Purchasing Managers’ Index results calculated by NBS and Markit/Caixin) also demonstrate a sharp drop of between 26.5 and 29.6 points in February, and the same thing has also happened to retail sales.
“Meanwhile, the unemployment rate has increased from 5.3% to 6.2%. That may seem little, but it represents almost four standard deviations in a very short time, in an economy in which this rate was historically stable,” he said.
Ribeiro said that some recovery can already be seen in high-frequency data, albeit in a tenuous and heterogeneous way. “In early March, the real estate sector recovered slightly and registered 47% of its activity level in January. In the coal sector, the figure was 70%,” he said.
On March 11, President Xi Jinping authorized the resumption of industrial activities in Wuhan. In the capital of Hubei province, the lockdown is scheduled to end on April 8. In other cities across the province, these restrictions will end on Wednesday, May 25, for people who are considered healthy.
“It remains to be seen how the second wave of contagion will affect these plans and how the service sector will respond, given that it is the most affected and represents 54% of Chinese GDP,” said Ribeiro, stressing that no other crisis in the country has had the same impact on disposable income observed today, because of the population’s high level of indebtedness combined with problems in finding employment as well as a banking sector grappling with financial intermediation problems.
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