Coronavirus: will China’s economy shrink for the first time since the Cultural Revolution in 1976?

Plunges in official and private sector purchasing managers’ indices amid the coronavirus outbreak prompted sharp revisions of economic forecasts

Analysts expect China to enact additional fiscal and monetary stimulus but stop short of massive support enacted after the global financial crisis in 2008

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Amid the outbreak of the coronavirus, the once unthinkable scenario in which China’s economy posts a zero growth rate or even an absolute contraction compared to the previous quarter is now seen as a real possibility. Photo: AP

Published: 10:00pm, 3 Mar 2020Updated: 2:27pm, 16 Mar 2020

The odds are rising that China will report a sharp deceleration in growth – or even a contraction in the first quarter as a result of the impact of the coronavirus epidemic.

The outbreak has paralysed the country’s manufacturing and service sectors, putting Beijing in the difficult position of either forgoing its economic growth goal for 2020 or returning to its old playbook of massive debt-fuelled economic stimulus to support growth.

The larger-than-expected deterioration in the official and private sector purchasing managers’ indices for both the manufacturing and services sectors to all-time lows in February – the first available economic indicators showing the extent of the economic damage done by the epidemic – has prompted economists to slash their Chinese growth forecasts.

Several are even expecting the once unthinkable scenario in which China’s economy posts a zero growth rate or even an absolute contraction compared to the previous quarter, even though the weakness is likely to be only short-lived.

A contraction in first quarter growth would be the first since the end of the Cultural Revolution in 1976.

A report published by the East Asian Institute at the National University Singapore noted that China could report a contraction of 6.3 per cent in the first quarter from the first quarter of 2019, while the growth rate for 2020 is set to fall well short of the 5.6 per cent needed by Beijing to meet its economic goal.

If China still wants to achieve an average 5.6 per cent growth for 2020, it would have to engineer a growth rate of as high as 12.7 per cent in the second half of the year, according to the report by Bert Hofman, Sarah Tong and Li Yao.

“The question is whether this is feasible and whether the consequences in terms of increased debt and potentially less productive investment are worth the price,” according to the report.