Unprecedented plunge in China’s Q1 GDP

Emily Nicol
Chris Scicluna

Overview:
While Chinese economic data reported an unprecedented plunge in GDP in Q1 (down 6.8%Y/Y and almost 10%Q/Q), Asian financial markets ended the week on an upbeat note. The impetus came from yesterday’s announcement by President Trump of new federal guidelines that will allow state governors to “take a phased and deliberate approach to reopening their individual states” over the coming month. According to the President, as many as 29 states might be expected to move to the first phase, whereby certain services could reopen with social distancing measures remaining in place, as early as today. Yesterday’s reports that trials of anti-viral drug remdesivir might be suggesting positive effects on Covid-19 patients added to the upbeat tone.

So, Asian-Pacific stock markets today chalked up gains across the board. In Japan, equities were unperturbed by PM Abe’s move yesterday to extend his state of emergency to the whole nation until the end of Golden Week, with the Nikkei 225 rallying 3.1% on the day, taking the rise from the March trough to more than 21%. Korea’s KOSPI also rose more than 3.0%, while China’s CSI300 rose a more modest 0.9%. US stock futures have also inevitably risen while European markets are opening higher this morning.

In bond markets, USTs opened significantly weaker, but have since recovered somewhat (10Y yields currently close to 0.65%, up about 3bps from yesterday’s US close). While 10Y JGBs remained well anchored close to zero per cent by the BoJ’s yield curve control, 2Y yields were a couple of bps higher. And in Europe, the improved risk appetite has seen BTPs outperform this morning, with 10Y yields down 4bps so far to back below 1.80%.

China:
China’s GDP in Q1 fell an extraordinary 6.8%Y/Y – close to the median forecast on the BBG survey – and 9.8%Q/Q on a seasonally adjusted basis, as the lockdown inevitably took its toll on economic activity. Secondary output was worst hit, down 9.6%Y/Y, while tertiary activity fell 5.2%Y/Y and primary sector output declined a more moderate 3.2%Y/Y.

Perhaps reassuringly, the monthly data point to an improvement in production at the end of the quarter. Most notably, total IP beat expectations, falling just 1.1%Y/Y (and 8.4%YTD/Y) in March, with manufacturing output down 1.8%Y/Y (and 10.2%YTD/Y). Production of autos, however, still lagged far behind, down more than 20%Y/Y in March and 26%YTD/Y. Fixed urban investment was still down a hefty 16.1%Y/Y in March, with capex in the state-owned sector down 12.8%Y/Y. And retail sales were perhaps most disappointing, down a steeper-than-expected 15.8%Y/Y and 19.0%YTD/Y.

With social distancing continuing domestically, and external demand having been hit by the global spread of Covid-19, it’s hard to believe that Q2 will see a V-shaped rebound in China’s year-on-year growth rate back close to the previous range. And additional policy stimulus would seem required to get full-year growth back into positive territory.

Japan:
As the number of confirmed coronavirus cases in Japan continued to rise and the geographical spread widened, Prime Minister Abe yesterday evening expanded the state of emergency from seven prefectures to the entire country through to 6 May in a bid to reduce non-essential travel heading into the Golden Week holidays. But after coming under criticism from some in the ruling coalition, he also amended the government’s proposed income support scheme in its economic support package, extending cash payments to all households rather just those that were previously to qualify due to loss of income. Indeed, rather than a ¥300k pay-out to affected residences, he now proposes to give ¥100k to every household regardless of the impact of Covid-19 on their income, a decision that will cost the government an estimated additional ¥8trn (more than 1% of GDP) compared with the initial draft package. And that implies a significant upside risk to the outlook for JGB issuance, just as the ¥16.8trn supplementary budget was due to be approved by the Diet in the coming week. The government now aims to submit the new spending plan by the end of the month.

A more comprehensive income support scheme could also be considered politically desirable in light of the recent drop in Abe’s support ratings. And it might be judged appropriately supportive of economic activity given the major shock underway. Indeed, even before the Covid-19 crisis intensified in Japan, the latest data suggest that the economy was struggling. Today’s data, for example, reported that tertiary activity fell ½%M/M in February, following downwardly revised growth (by ½ppt to 0.3%M/M) in January. While the weakness was broad-based, there were sizeable declines in retail and recreational-related activity (down 4½%M/M a piece), as the hit to tourism from various travel restrictions in Asia took their toll. And with overseas visitors having plummeted in March (down 93%Y/Y to the lowest level since the series began in the early 1990s) this weakness seems bound to have markedly intensified in the final month of the quarter.

Updated industrial production figures for February also revealed a sizeable downwards revision, with output now assessed to have declined 0.3%M/M compared with the 0.4%M/M increase initially estimated. And the revisions were widespread, with production of autos down 4.8%M/M (from an initial drop of 2.5%M/M), electrical machinery down 1.4%M/M (from +0.8%M/M) and production machinery down 5%M/M (from -2.2%M/M). Overall, this left manufacturing output down 5.7%Y/Y and in the first two months of Q1 already trending almost ½% lower than the Q4 average.

Euro area:
We have already seen car registrations figures for March predictably plunging last month, with those in the euro area falling at a record year-on-year rate of 58.5%Y/Y. This left the number of car registrations in the euro area at just 459k units in March, the lowest since the series began in the late 1980s. Of course, the slump in demand is hardly surprising given that lockdown measures came into force in most European markets through the second half of last month. While the weakness was widespread, the drop was most pronounced in Italy where car registrations declined a whopping 85.4%Y/Y. Drops in France (-72.2%Y/Y) and Spain (-69.3%Y/Y) were also marked, as was the 37.7%Y/Y fall in Germany. And with lockdown measures still largely in place in the largest four member states (and to remain so until at least early May), we will see another sizeable decline in car registrations this month too.

This morning will also bring final euro area inflation data for March. In light of revised member state figures published over recent days – i.e. French inflation was revised slightly higher than the flash, while Spanish was revised lower – and given the rounding in the flash release, headline inflation for the euro area as a whole might well be nudged higher from the flash by 0.1ppt to 0.8%Y/Y. But this would still represent a drop of 0.4ppt from February on the back of weaker energy inflation. Indeed, flash core inflation eased just 0.2ppt to 1.0%Y/Y. Of less interest today will be euro area construction figures for February which are expected to show a decline following a surge in January.

US:
It should be a relatively quiet end to the week for US economic data, with just the Conference Board’s Leading index for March due for release.

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