China Economy Seen in Deeper Contraction on Factory Drop

(C) Reuters. China Economy Seen in Deeper Contraction on Factory Drop

(Bloomberg) — China’s economy could be heading for a worse-than-expected first-quarter contraction after the country’s manufacturing sector reported activity at a record low in February due to the coronavirus outbreak.

The manufacturing purchasing managers’ index plunged to 35.7 in February from 50 the previous month, according to data released by the National Bureau of Statistics on Saturday. Even before that data, the median forecast of economists surveyed by Bloomberg News was that the economy would shrink in the three months through March from the last quarter of 2019, and the surprisingly weak data prompted further cuts to that view.

Gross domestic product may now shrink by 2.5% in the first quarter from the previous period, Nomura Holdings Inc. economists led by Lu Ting said in a report Saturday after the data release. That was a cut from their previous forecast of -1.5% in a Bloomberg survey last week. Standard Chartered (LON:STAN) Plc already expected a 1.5% contraction before the data, while Australia & New Zealand Banking Group Ltd. is forecasting a 2% drop, according to reports after the release.

Bloomberg Economics now expects a contraction of 3%, but cautioned that it’s subject to considerable uncertainty.

“The extent of the slump in China, the blow to global supply chains, and the trajectory of the outbreak in China and globally are all difficult to gauge with a high degree of accuracy,” Bloomberg economists led by Chang Shu wrote in a report.

China Factory Activity Weakest on Record Due to Coronavirus

If the economy were to contract, it would be the first time that’s happened in comparable data dating back to 2011.

Pacific Investment Management Co. also sees the virus outbreak causing a contraction, forecasting a 6% annualized drop in China’s first-quarter GDP, while Barclays (LON:BARC) Bank Plc economists see an 8.9% drop, followed by a quick recovery. Pimco’s view gels with Goldman Sachs Group Inc (NYSE:GS). economists, who said in a report Friday that global GDP will shrink on a quarterly basis in the first two quarters of this year before rebounding in the second half.

The factory PMI data may improve in March, CICC analysts including Yue Yan wrote in a note Saturday.

“Strenuous containment measures were taken after the outbreak of COVID-19, which understandably dampened economic activities in the short term,” they wrote. “With the outbreak gradually under control, government agencies have been clearing the unwanted obstacles for production resumption.”

Nomura’s Lu also expects the March PMIs to rebound, but says activity data will be zero or negative as businesses won’t be completely back.

On a year-on-year comparison, the median forecast for first-quarter GDP growth is 4.3%. That was before Saturday’s data. Nomura and ANZ both now see it rising 2%, while Standard Chartered expects a 2.8% expansion.

(Updates with estimates from Bloomberg Economics and Barclays.)