China’s economy set for ‘painful, bumpy’ road amid zero-Covid exit as November retail sales plunge

A sharp fall in retail sales and a surge in its jobless rate in November highlights the “painful and bumpy” road ahead for China amid its exit from its zero-Covid policy, with the economy not set to “return to normal” until the second quarter of next year, analysts said.

Coronavirus outbreaks worsened in China last month amid a rise in cases, triggering stricter control measures that curbed mobility, capped factory production and hurt confidence, leading to retail sales to fall by 5.9 per cent compared to a year earlier, the National Bureau of Statistics (NBS) confirmed on Thursday.

The figure missed expectations, falling from minus 0.5 per cent in October to the lowest reading since dropping to minus 6.7 per cent in May and minus 11.1 per cent in April.

Analysts at Capital Economics said the coronavirus “situation is largely to blame”, with the easing of restrictions towards the end of the month offering “little in the way of relief”.

The urban surveyed jobless rate, meanwhile, stood at 5.7 per cent in November, up from 5.5 per cent in October, to the highest reading since the rate stood at 6.1 per cent in April.

The jobless rate for the 16-24 age group also remained at an elevated level of 17.1 per cent in November, but down from 17.9 per cent in October.

“I would say China’s economy is getting worse before getting better,” said Larry Hu, chief China economist at Macquarie Capital.

China is set to endure a relatively strong virus hit in the short term as it eases control measures, Hu added, with the economic recovery likely to be worse until the end of the year.

“We have already seen the data for October and November, so the fourth quarter will certainly be dismal, and China’s economic growth may not even reach 3 per cent for the whole year,” Hu said.

“The downside of living with Covid so quickly is that it will create a large shock in the short term. China’s economy is likely to return to normal by the second quarter of next year, but only after it undergoes considerable pressure in the first quarter of 2023.”

China’s consumption will probably show zero growth this year, according to Hu, before returning to expansion of at least 8 per cent in 2023, with the rapid rise in household savings to 15 trillion yuan (US$2.2 trillion) this year, showing that residents still have a strong capacity to consume.

“It’s not their willingness that affects them most in the short term, but the anxiety about contracting the virus, which may take two or three months to slowly fade away,” Hu added.

Also on Thursday, the NBS confirmed industrial production, a gauge of activity in the manufacturing, mining and utilities sectors, rose by 2.2 per cent in November, year on year.

“While the virus outbreak has disrupted production in some parts of the country, we think most of the weakness is due to a drop in demand, especially from overseas,” said Julian Evans-Pritchard and Zichun Huang, China economists at Capital Economics.

Meanwhile, fixed-asset investment – a gauge of expenditure on items including infrastructure, property, machinery and equipment that Beijing has relied on this year to stem downturn risks – rose by 5.3 per cent in the first 11 months, year on year, down from a rise of 5.8 per cent between January and October.

Analysts at Capital Economics said that “fixed investment held up better than consumption”, but that monthly growth slowed sharply from 5 per cent to 0.9 per cent compared to a year earlier, which was the lowest reading in 12 months.

Beijing has pledged to stabilise economic growth, employment and prices next year amid its exit from the zero-Covid policy which has slowed China’s economy in 2022.

But economists at Nomura said that further economic disruptions could happen due to the upcoming migration around the Lunar New Year holiday in late January, which could trigger an unprecedented spread of the coronavirus.

“Despite the substantial resources devoted to the heavy-handed zero-Covid policy over the past two years, China does not appear to be well prepared for a massive wave of Covid infections, and it may have to pay a high price for its procrastination on embracing a ‘living with Covid’ approach,” the economists said.

Nomura has raised its growth forecast for China to 4.8 per cent in 2023, up from 4 per cent a week earlier, although they “continue to caution that the road to a full reopening may still be painful and bumpy”.