Chinese recovery leaves world in the shade, but trouble looms

The coronavirus may have originated in China but its economic impact is being felt most acutely elsewhere.

Picture: AFP

The coronavirus may have originated in China but its economic impact is being felt most acutely elsewhere.

From Europe to North America, advanced nations are battling to contain a resurgence in infection rates and are bracing themselves for double-digit falls in output this year. They can only look with envy to China, where the economy has already recovered.

There are questions over the veracity of official data but China is likely to end the year with an even bigger economy than it had at the start. Economists at the International Monetary Fund are pencilling in annual growth of 1.9 per cent, which puts the country miles ahead of its rivals. The US, Germany and Britain are expected to shrink by 4.3 per cent, 6 per cent and 9.8 per cent respectively.

After relaxing their lockdowns over the northern summer, Western rivals are struggling to protect their economies from a second wave of the virus.

China deployed a severe lockdown and a robust testing regime to contain the virus the first time round. Although its economy shrank at a record pace at the beginning of the year, the subsequent recovery has not yet come under threat.

At the same time growth has powered ahead thanks to a state-backed boom in infrastructure projects, including roads and high-speed train lines. This has ­fuelled the strong rebound in industrial production, which beat forecasts to grow by 6.9 per cent in the year to September. This was up from 5.6 per cent in August.

Exports, which make up 17 per cent of Chinese GDP, have also sustained the economy with four consecutive quarters of growth.

The country’s exporters have been taking market share from other parts of the world, where production is still hampered by restrictions. This has helped to fuel export growth, even as the global economy has started to soften once again. Last month exports hit their highest level this year, climbing by 9.9 per cent, thanks to a big jump in demand from US consumers.

Yet there are risks on the horizon for China. Infrastructure-­related production is starting to soften, which could pose a problem as Beijing has given no clear indication that it plans to unleash more stimulus.

With the global economy battling a second wave of cases, the country’s exporters could soon start to come under pressure. There is already evidence of this in Chinese trade in Europe, where China’s exports are struggling to sustain any momentum from already subdued levels.

Chinese consumers kept a low profile during the first phase of the recovery. Domestic demand remained weak as lingering fears about the virus kept people away from shops and restaurants, particularly in less affluent parts of the country. Inventories surged as demand failed to keep up with the state-backed industrial boom.

This is starting to change. Retail sales jumped from 0.5 to 3.3 per cent in September, marking the second month of growth after seven consecutive months of decline. Services production climbed from 4 to 5.4 per cent during the quarter.

The benefits are being felt in the jobs market, where Chinese workers have been returning to work in greater numbers. At 5.4 per cent, the unemployment rate is only 0.2 percentage points higher than it was at the end of last year. Migrant workers are flooding back into the cities and income growth is rebounding.

Capital Economics senior China economist Julian Evans-Pritchard said: “We think growth will continue to pick up in the near term. Fiscal policy is set to remain supportive until at least the start of next year, which should keep activity in industry and construction strong … The recovery in consumption and services activity probably has further to run.”

Although consumption is recovering, it remains the primary drag on the economy.

“The disappointing tourism numbers during the recent Golden Week break in the first week of October suggest that household spending is still far from a full recovery,” said Miguel Chanco, senior Asia economist at Pantheon Macroeconomics.

THE TIMES