Kevin Yao

BEIJING, (Reuters) – China will report a marked decline in economic activity March due to COVID-19 lockdowns and outbreaks that hit factories and consumers. However, first quarter growth could have risen because of a strong start to the year.

Gross domestic product (GDP), according to Reuters poll, grew 4.4% in January and March from a previous year, a Reuters poll revealed. The fourth quarter’s 4.0% rate was surpassed by Monday due to a remarkable solid start in the first 2 months.

The poll revealed that GDP growth in the first quarter is expected to be 0.6%, down from 1.6% in October/December. It also points to a slowing trend.

An analysis suggests that separate data from March, including retail sales activity, could show an even more severe slowdown. Analysts say this is because of China’s strenuous efforts to limit its worst COVID infection since it was discovered in Wuhan at the end of 2019.

Analysts believe April will be even worse with the lockdowns continuing in Shanghai’s commercial centre and elsewhere. Economists believe that the risk of recession is increasing.

On Monday, the government will release Q1 and March numbers at 2:00 GMT. Investors are speculating about the possibility of further economic stimulus.

China’s central banks announced Friday night that they would reduce cash reserves required by banks for this year. They will release about 530 Billion Yuan (83.25Billion USD) long-term liquidity.

It was widely expected that the State Council or cabinet would make this decision after it stated on Wednesday that monetary tools, such as cuts in banks reserve requirement ratios, (RRRs), must be applied in a prompt manner.

The policy insiders stated that the government must ensure there is no disruption before the two-a-decade gathering of Communist Party members in autumn. This meeting will be President Xi Jinping’s third term.

Beijing’s strict COVID-19 zero tolerance policy is starting to take a heavy toll on the 2nd largest economy. It is also disrupting global supply chains, ranging from automobiles to iPhones.

Analysts believe that the central bank will prioritize growth in the lead-up to Party Congress. This is especially true as the COVID fight drags on, and the housing market fails to recover. Barclays In a note, it is written (LON:).

The gauge of consumer consumption, retail sales, has been declining since COVID-19’s inception. It is likely that March saw a 1.6% decline in retail sales compared to a year ago. This would mark the lowest showing since June 2020 and reverse a 6.7% increase in the previous two months.

The likelihood is that industrial output grew by 4.5% in March compared to 7.5% a year ago. This slowdown was despite fixed-asset investment growing 8.5% in January-March, versus 12.2% in two previous months.

The Reuters poll predicted that China would slow its growth to 5.0% in 2022. It suggests that there is a steep climb ahead for the government to reach this year’s goal of about 5.5%.

Barclays projects that second quarter GDP growth will drop to 3%. This would drag 2022 growth down to 4.2%.

China’s exports are suffering from fatigue, as a result of a weakening demand in China and logistical problems related to COVID.

This year’s fiscal stimulus includes a stepped up in local bond issuance for infrastructure projects and a reduction of taxes for business.

However, analysts don’t think rate cuts could be effective in halting the economy slump. This is because many businesses and factories are struggling and people remain cautious about their spending. China’s financial markets could be under more pressure if there is more aggressive easing.

“I don’t think this RRR cut (on Friday) matters that much for the economy at this stage,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management, noting it was less than markets had expected.

Omicron infections and restrictions on mobility is the biggest challenge facing the economy. More liquidity may help on the margin, but it doesn’t address the root of the problem. Supply chain disruptions pose serious risks to manufacturers.

The economy will not grow if there are no effective policies that address mobility. In Q2, I anticipate negative GDP growth.”