On Friday, for the first time on record (and likely 4 decades+), China's economy contracted a whopping 6.8% y/y in the first quarter. Spending some time thinking through this, I have a few thoughts and would be interested to see if others have any feelings or ideas, as we try and move through this incredibly complex environment. This data was (by my observation) largely ignored and overshadowed by the outcome of the unofficial Gilead trial which came out on Thursday night and the plan for "reopening the economy" that was also announced. It actually amazed me how little time was actually devoted to dissecting the data, given the magnitude of this drop.
China's economy dropped by this much, and they really only completely shut down one province (to the best of my understanding), rather than the entire country like here in the US. Given that China is being seen as the blueprint for re-opening, I think looking at the data makes a lot of sense. The two figures that interest me the most, and in my mind point to a much longer economic recovery than one may think, is the relationship between the industrial production figure and the retail spending figure. Industrial production improved significantly in March, with only a 1% drop, compared with 13% in January and February. To me, at a very high level, this would imply that by and large, China is back to work. This is all in, a pretty positive sign, albeit pretty shocking, but they did to a great job in containing it and the lockdown was largely focused on the Wuhan Province.
That said, even with people being "back to work," they still are not spending. Retail sales were still down 16%, only slightly better than the 20% fall in January and February. To me, this would imply what some of the more bearish views on the street are saying, that even when we manage to re-open the economy, consumer spending is not going to get back to pre-COVID levels anytime soon, and for a country that's 70% consumer driven, I don't view that as an overly positive sign of things to come in coming quarters. Exacerbating the problem is that the US shutdown, and US layoffs, have been nationwide, not largely contained...
Thoughts?
Not clear what you are looking for? I think the biggest risks at this point are not economic. Also, China actually had stringent lockdowns which have slowly been unwound in other provinces too. This means that everyone is on edge and social interactions are minimized so the tepid recovery in retail is expected. That will take at least 3 months for the news cycle to swing from portraying this as an end-of-world pandemic to this is something that we now understand better and have sufficient test/trace/isolate process to keep in check regardless of new treatments. That last point is very important, Western media hasn't concentrated on China due to political sensitivities but their ability to test and trace is very well-disciplined and extremely effective. I would say its on par with South Korea, and more impressive considering the larger geographic size and population. USA has not had anywhere near the hard lockdowns we saw in Wuhan.
Even in China, the layoffs have been nationwide so its not completely different. The greater concern is whether the heated rhetoric actually leads to action as everyone is brandishing nationalism and urging self-sufficiency for medical supply lines. You see the hawks in Washington who are already hammering away. This is the greatest danger moving forward. If this diplomatic friction doesn't cool the fallout will be far worse than this virus.
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