18.04.202213:37 Forex Analysis & Reviews: Covid-19 outbreak in China damages growth prospects of country's economy

China's economy is set to break growth records, but an unexpected outbreak of coronavirus, forced restrictive measures, and numerous problems abroad are limiting its surge.

In Q1 2022, the country's GDP showed fairly strong growth compared to the previous quarter. The GDP jumped by 4.8% on a yearly basis, according to the published data from the National Bureau of Statistics of China. According to Trading Economics, experts had forecasted China's economy to grow at a lower rate of 4.4%. Notably, in Q4 2021, China's GDP rose at an annualized rate of 4%. In the first three months from the beginning of this year, the Chinese economy grew by 1.3%.

China is trying to cope with the resulting domestic and external difficulties, compensating for the obvious dips in the economy in March with surprisingly strong growth of indicators in January and February. However, the effects of the COVID-19 outbreak on China's economy cannot be avoided. Severe restrictive measures, which the Chinese government imposed on its population in March, undermined the production of goods and markedly reduced consumer spending within the country. Only the sharp growth of the economy in the first two months of 2022 formed quite optimistic overall figures for the entire first quarter.

Consequently, retail sales fell by 3.5% in March, showing a much worse-than-forecast reading, while in January-February they were estimated at 6.7%.

The Chinese labor market traditionally experienced a revival in March, as factories usually try to attract as many employees as possible to their shops after the Lunar New Year holiday. This March, however, the sector suffered a severe shock. According to surveys, the national unemployment rate in March was 5.8%, which was last seen only at the beginning of 2020. Moreover, unemployment in more than thirty major cities reached a record 6.0%.

The industrial sector in China showed more positive figures in March than the labor market. Given the widespread shutdowns, production managed to increase by 5.0% year-on-year and even beat forecasts of 4.5%. However, we should admit that compared to the unprecedented rise in January-February, when production increased by 7.5%, the figures for March were rather lackluster.

The investment into the fixed capital in the first quarter is following a similar scenario: investment increased, but there was some damage in March to the elated growth of the first two months of the year. Thus, investment in fixed capital in the first quarter grew by 9.3% year-on-year, but this growth is not so positive, as in the first two months alone it was as much as 12.2%. Notably, fixed-asset investment is the key growth driver of the Chinese economy. These are the indicators that the Chinese government is counting on.

The real estate market in China is increasingly slipping into recession. Home sales by value fell by a full 26.2% year-over-year in March, and new construction declined by 17.5%. According to Reuters, the drop was the largest since early 2020.

The unexpected outbreak of coronavirus in China derailed the enthusiastic growth of the economy and sent it into a sluggish state of moderate recovery. The Russian-Ukrainian conflict and the sanctions imposed on Russia have also hit key sectors of the Chinese economy, as they have shaped unprecedented increases in the prices of energy, metals, and wheat, and further undermined global supply chains.

Many economists are already highly doubtful that Beijing can achieve its goal of a 5.5% GDP increase this year. The Wall Street Journal notes that demand for Chinese exports in the US and Europe has been severely weakened due to record inflation last seen decades ago.