INSIGHT: Low-base effect behind China’s strong Q1 GDP growth

SINGAPORE (ICIS)–China’s first-quarter economic performance this year appeared sterling at first look, but the double-digit growth was largely due to a low-base effect as the world’s second-biggest economy shrank at a record pace in the same period in 2020 because of the coronavirus pandemic.

The economy posted an 18.3% year-on-year growth in January-March 2021, coming from a 6.8% contraction in the same period last year as China resorted to a lockdown at the height of the coronavirus outbreak in the country.

Compared with the fourth quarter of 2020, however, some weakness was apparent, particularly in the first two months of 2021, when concerns about another wave of infections led to re-imposition of some restrictions, particularly in the northern region.

China’s first-quarter annualised GDP growth came in lower than the 19.3% forecast of UK-based research firm Oxford Economics, indicating a 0.7% quarter-on-quarter decline in output, reversing the estimated 2.9% growth in October-December 2020.

For Singapore-based DBS Group, the Chinese economy posted a slower growth of 0.6% in January-March 2021, on a quarter-on-quarter basis.

The exports sector is a major economic driver, with shipments projected to have increased by 9.7% quarter on quarter in real terms amid improved global demand, while import volumes were up 3.6% over the same period, Oxford Economics said.

“We expect robust economic growth to resume after the temporary weakness in Q1 and are optimistic about exports and manufacturing investment,”  Tommy Wu, an economist at Oxford Economics, said in a note.

On the consumption front, much will depend on the success of coronavirus vaccine rollouts across the country.

“We currently see more downside than upside risk regarding the objective to vaccinate 40% of the population by end-Q2,” Wu said, adding that slower credit growth will dampen real estate and infrastructure investments.

Oxford Economics has maintained its full-year GDP growth forecast of 8.9% for China, while DBS Group is projecting a stronger growth of 10.5%.

“The supply-side was the prime engine of growth,” DBS Group said in a research note, citing stronger growth in production of machinery and health care-related products, with automobile production growing for 12 consecutive months.

DBS Group said that global economic recovery should fuel China’s export-led production growth, further aided by easing of trade tensions with the US, under the Biden administration.

“Looking ahead, the growth figures will ease as the base-effect fades, but headline growth will likely be much stronger than the rest of the world,” DBS Group stated in a research note.

China’s is faring much better economically than its counterparts in the West, having emerged much earlier from paralysing lockdowns after largely containing the spread of the deadly COVID-19 cases in the country, with the recent daily increase in infections in the low teens.

As of 15 April, China’s total confirmed coronavirus cases stood at 103,185 with 4,856 deaths, data from the World Health Organization (WHO) showed.

Global coronavirus cases stood at almost 138m with the death toll at nearly 3m, according to the data.

The coronavirus outbreak was believed to have started in Wuhan in China’s central province of Hubei in late 2019. It was declared a pandemic by early March 2020 which had sent the global economy plunging into a deep recession.

Recovery hopes for 2021 are underpinned by vaccine rollouts to combat the pandemic, but these are proving to be slow while the spike in global infections has persisted unabated more than a year since the outbreak.

Based on WHO data as of 14 April, more than 734m vaccine doses have been administered globally.

Insight by Pearl Bantillo

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