Chart of the Day 19 April 2020

China, as we know, was ground zero for the coronavirus. It was also the first to enact strict lockdowns, starting in Wuhan but soon spreading to several other cities. The impact on its economy has been staggering.

On Friday, China released real economic growth numbers showing a 6.8% contraction  in the first quarter compared to a year ago. This is the first time in over 40 years that the economy shrank, or at least the first time since China started producing fairly reliable numbers. I say “fairly”, because as you can see on the chart, the real GDP growth rate has been improbably smooth for a long time. For that reason, economists tend to use all manner of proxy growth statistics in addition to the official numbers. I just like to look at nominal growth (real growth plus inflation) as it shows changes in the underlying growth rate more clearly. Either way, there is no denying that large parts of the world’s number two economy came to a crashing halt in the first quarter.

Two further points:

·        Since China was first-in and first-out of the corona-crisis (FIFO as the accountants would say) it will offer important clues as to how other economies will perform once lock-downs start easing. What I’m particularly interested in is changes in consumer behaviour. Will people be prepared to board planes again? How long before they go to movie theatres? Or visit restaurants? When will they have the confidence to spend money on big-ticket items such as cars or overseas holidays?

·        As you can see on the chart, China’s longer-term growth rate was slowing even before the corona-crisis as its economy matured. At the same time, debt levels in the corporate sector in particular grew rapidly. This explosion in debt wasn’t much of an issue as long as firms could generate the cash flow to service the debt. That means there must be several chickens coming home to roost now. How authorities deal with this will be crucial for the future growth path of the economy.