China: 2020 GDP forecast revised down
In our original 2020 Chinese macro scenario, we expected growth in China to moderate to 5.9% in 2020 from 6.1% in 2019 due to continued trade tensions with the US and the lingering impact of the authorities’ deleveraging campaign. We also expected Chinese growth in 2020 to be front-loaded to the first half due to a cyclical recovery, especially in the industrial sector. But in light of the coronavirus outbreak, we have decided to downgrade our expectation for Chinese GDP growth in 2020 to 5.6%, with the impact concentrated in Q1. In our base-case scenario, we expect growth to start to rebound in Q2 as the virus comes under control in most parts of the country and government policy stimulus kicks in.
The Chinese authorities have started to provide policy support to mitigate the virus’s impact on the economy. After significant liquidity injections by the central bank, interest rate cuts are expected. We also expect local governments to introduce targeted fiscal measures to support small- and medium-sized enterprises.
However, these measures are unlikely to fully compensate for the loss of output in the near term, as much of this loss is in the form of reduced consumption of services. The services sector, which has accounted for about 60% of Chinese growth in recent years, will be the most heavily hit—especially tourism, restaurants and hotels, entertainment, retail sales, logistics and so on. Industrial production and fixed-asset investment will also be affected by the extension of the Chinese New Year holidays and by interruptions in supply chains.
Although the impact of the 2019-nCoV outbreak on the economy is likely to be quite substantial, it is a one-off ‘exogenous’ shock that does not change China’s underlying growth trend. Many factors that have supported our view of a cyclical recovery are still in place, and could come back into play once the epidemic peters out.
Our base-case scenario (60% probability) is that Chinese GDP growth in Q1 may slow to 4.0-4.5% compared to our previous forecast of 6.0%. Full-year GDP growth may slow by about 0.3 percentage points, reaching 5.6% in 2020 instead of 5.9%. The new figure takes into account payback effects in the rest of the year and government policy support. In a downside scenario (20% probability), we see virus infections turning more serious in areas outside of Hubei and the epidemic draging on into Q2. In this case, Q1 GDP growth may slow to 3.5-4.0% and full-year GDP growth to 4.2-4.7%. In our upside scenario, the outbreak in Hubei province ends at end Q1-early Q2 while in other parts of the country the outbreak ends at end of February (20%), . Q1 growth could be similar as for the base-case scenario (4.0-4.5%), but the full-year impact of the virus could be slightly milder, with 2020 GDP growth coming in at 5.7%.
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