CNN — The Chinese economy got off to a good start to the year, posting growth in the first quarter that exceeded expectations. But a recent plunge in consumer spending and rising unemployment suggest much tougher months ahead with dozens of cities still under Covid lockdown.
China’s gross domestic product rose 4.8% in the three months to March 31, compared with the same period last year, according to the National Bureau of Statistics on Monday. That was faster than the 4% increase recorded by the world’s second-largest economy in the previous quarter.
Growth was supported by surprisingly strong economic performance in January and February, with several indicators for those two months beating analysts’ forecasts.
But Beijing’s efforts to curb its worst Covid outbreak in two years have dealt a major blow to activity since March, including in the country’s financial and manufacturing hub – Shanghai. Many companies have been forced to suspend operations, including automakers Volkswagen and Tesla and iPhone assembler Pegatron.
Retail sales fell 3.5% in March from a year ago, the first decline since July 2020. Industrial production rose 5% in March, down from 7.5% in the first two months of the year.
“Economic development is currently facing many difficulties and challenges,” NBS spokesman Fu Linghui said Monday at a press conference in Beijing.
Covid outbreaks in March disrupted production in some regions and hurt consumption, Fu said. In particular, catering, tourism and transport services have been hit hard.
As a result of the “Covid shock”, unemployment rose, he said.
Unemployment in 31 major cities jumped to 6% in March, a record. Among 16 to 24 year olds, unemployment reached 16%, its highest level in eight months.
The growth target seems ambitious
The Chinese government has set a growth target for this year of around 5.5%, the lowest in three decades. But the Covid outbreak, combined with the war in Ukraine – which has driven up oil and commodity prices – has already made that seem out of reach for many economists.
“April economic data is expected to deteriorate further,” Larry Hu, chief economist for Greater China at Macquarie Group, wrote on Monday. He expects growth for the year to be around 5%.
Some analysts are even talking about the risk of a downturn in the economy in the current quarter, as the lingering Chinese real estate crisis exerts even more pressure.
“Activity data is set to fall in April as second-quarter recession risks rise,” analysts at Japanese investment bank Nomura wrote on Monday.
“Beijing’s GDP growth target is [about] 5.5% this year is getting harder and harder, and we now see significant downside risks to our annual GDP growth forecast of 4.3%,” they added.
Containment leaves the economy “in distress”
Shanghai is the epicenter of the current Covid outbreak, but it’s not the only one – Nomura estimates full or partial shutdowns are in place in 45 Chinese cities, affecting a quarter of the country’s population and around 40% economy.
In a bid to ease the disruption, the Chinese government on Friday released a “white list” of 666 companies that will be allowed to resume production. Nearly 40% are car manufacturers or companies involved in supplying the automotive industry. It is unclear when these companies will be able to resume production.
China’s zero Covid strategy remains the main risk to its economic outlook.
“In reality, the economy is in trouble,” Societe Generale analysts said on Monday. “The problem, as we have repeatedly pointed out, is the lockdowns – still in place and still spreading.”
Chinese Premier Li Keqiang repeatedly warned last week of the threat the upsurge in Covid cases poses to growth and jobs. Last Wednesday, he promised more interest rate cuts to stimulate the economy. Two days later, the People’s Bank of China announced a reduction in the reserve requirement ratio – which dictates how much cash banks must hold in their reserves – a move intended to boost lending.
— CNN’s Beijing bureau contributed to this report.
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