The coronavirus pandemic led the economy to log its worst economic performance since, at least, 1992 in the first quarter. All GDP compon...

Outlook Worsens For China

The coronavirus pandemic led the economy to log its worst economic performance since, at least, 1992 in the first quarter. All GDP components likely nosedived in Q1 due to the implementation of social distancing and other quarantine measures. Although industrial production and urban fixed investment data improved somewhat in March, retail sales remained depressed, suggesting that it will take a long time before consumers’ shopping appetite returns. Exports plummeted in March as the pandemic spread among China’s main trading partners. Plans of a rumored largerscale stimulus have yet to materialize, although pro-growth measures could be announced during the National People’s Congress. The allimportant meeting, which sets the economic targets and was originally planned for March, has been postponed due to the outbreak

Despite success in containing Covid-19, hopes of a sustained recovery are waning. Consumers remain wary amid fears of a second infection wave and economic uncertainties, while policy stimulus has been relatively contained so far. Moreover, a sharp fall in external demand due to the rapid spread of Covid-19 is a key downside risk to the outlook. FocusEconomics panelists see the economy growing 1.9% in 2020, which is down 1.9 percentage points from last month’s forecast, before accelerating to 7.4% in 2021.

Inflation decelerated further in March, falling from 5.2% in February to 4.3%. This mostly reflected Covid-19 hammering domestic demand and lower prices for oil. Inflation should moderate further in the coming months as the impact of the swine fever on meat prices fades away and the economy feels the impact of weak demand and low oil prices. FocusEconomics panelists forecast that inflation will average 3.3% in 2020, which is unchanged from last month’s estimate, and 2.1% in 2021.

The People’s Bank of China (PBOC) cut its main interest rates again in recent weeks in order to shore up economic growth. On 20 April, the PBOC slashed the one-year prime lending rate by 20 basis points to 3.85%. Although further monetary stimulus could be in the pipeline, it will mostly be in the form of cuts to the reserve requirement ratio and injections into the banking system. Panelists project the one-year deposit and loan prime rates to close 2020 at 1.29% and 3.62%, respectively, and 2021 at 1.36% and 3.59%.

Despite a dire economic outlook, the yuan was broadly stable in recent weeks. This mostly reflected PBOC’s efforts to maintain the yuan stable against the greenback in order to alleviate any fear of a financial crisis. On 24 April, the yuan traded at 7.08 CNY per USD, depreciating 0.3% month-on-month. Looking forward, the yuan is expected to remain at around current levels. Our panelists see the yuan ending 2020 at 7.02 CNY per USD and 2021 at 6.99 CNY per USD.

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