Source: AFP
Source: AFP
China’s economy is suffering a sudden shock as the end of strict quarantines, stringent lockdowns and mass testing to achieve ‘zero-Covid’ cases causes the virus to sweep across the country.
Source: Bank of Singapore, Bloomberg.
December’s official purchasing manager indices (PMIs) – a key measure of business confidence – showed the impact on activity from China’s exit wave of infections. The manufacturing index fell from 48.0 in November to 47.0 last month signalling sentiment has turned increasingly contractionary as the first chart shows. Moreover, services PMI plunged from 46.7 to just 41.6. Thus, both measures of firms’ confidence have fallen to their lowest levels since 1Q20 when the pandemic first emerged.
Source: Bank of Singapore, Bloomberg.
In the near term, activity is set to stay weak. Ahead of the lunar new year, demand in the economy is suffering as consumers are cautious. At the same time, supply chains are being disrupted as employees become exposed to the virus. The second chart shows that already in November retail sales were 5.9% lower than a year ago and industrial production was only expanding by 2.2%.
December’s activity data may be even worse as the latest PMI data suggest. But China’s rapid reopening is likely to result in a robust rebound afterwards once the virus has finished sweeping the country and immunity levels rise. The economy may therefore experience a second V-shaped recovery in 2023 to the benefit of China’s financial markets.
In 2020, GDP only grew 2.2% in the first year of the pandemic before rebounding 8.1% in 2021 as the authorities initially contained the virus. China’s first V-shaped recovery helped support the country’s risk assets.
Similarly, last year’s lockdowns and the sudden abandonment of China’s zero-Covid measures towards the end of the year are likely to cause GDP growth to be weak in 2022 with our forecast of a 3.0% expansion set to be missed now. But rapid reopening should cause GDP growth to rebound again and surpass our 4.5% forecast for 2023, enabling China to experience its second V-shaped recovery of the pandemic.
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