China’s GDP shrank 6.8% YoY in 1Q, within market expectation and was better than IMF’s forecast of -8% on 15 Apr. After a broad freefall in Jan-Feb, the economy regained some strength in Mar. However, the rebound was unsynchronized and uneven across sectors and industries. While supply recovery was on track, demand may further be inflicted by the adverse feedback loop on employment and income growth. Future trajectory of growth will hinge on domestic consumption recovery as well as pandemic control in global market.
- Industrial production picked up fast in Mar, narrowing YoY declined to 1.1% from 15.7% in Jan-Feb. High-tech and high-end manufacturing retrieved pre-pandemic pace of growth in Mar. Automobile output was weak in 1Q20, but is likely to strengthen in 2Q thanks to improving downstream sales in Apr.
- FAI – rigorous infrastructure, stable real estate and grim manufacturing. 1) Real estate was the most resilient component of FAI in 1Q (-7.7% YoY) and is likely to maintain stable growth even without massive stimulus. 2) Infrastructure investment declined 19.7% in 1Q but construction resumed quickly since Mar and we believe growth will pick up faster in 2Q on back of government support. 3) Manufacturing FAI declined 25.2% in 1Q and future rebound will likely be inflicted by uncertainties in global markets.
- Consumption recovery remained lackluster. Retail sales value declined 19.0% YoY in 1Q20 (-20.5% in Jan-Feb, -15.8% in Mar). For most categories of goods and services, YoY decline remained at double-digit rate in Mar and recorded only marginal improvement. Decline in catering even widened in Mar to 46.8% YoY. We think consumption recovery will be shallower than investment primarily because economic downturns weigh on income growth of households and there are consumer behavior shifts after COVID-19.
- Policy support: targeted + broad. In terms of investment, we expect policy stimulus to be targeted towards certain industries (high-tech manufacturing, infrastructure, those related to people’s livelihood). For consumption, policy support tends to be more broad-based, coming up with subsidies and coupons across the nation and boosting particularly big-ticket items, catering, travel, cultural recreation services, etc. Policy stimulus shall also aim to ensure that SMEs and low-income population are not left behind.
- Outlook. In 1Q, it was primarily supply disturbance due to lockdowns that lead to economic downturn. Since 2Q, however, negatives in the demand side have begun to loop in and are likely to sustain. In base case scenario, we forecast GDP to advance 3.0%/6.5%/7.0% in 2Q/3Q/4Q, respectively, which yields annual GDP growth of 2.8%. In the bull case, more rigorous recovery in 2Q-4Q would peg annual growth at 3.5% YoY.