In the first quarter of this year, China's economy recovered steadily, and the economic growth rate remained within a reasonable range, but due to the situation in Russia and Ukraine and the domestic epidemic, the downward pressure on the economy began to appear since March. The author believes that the current round of the epidemic has caused five impacts on economic activities: first, the epidemic has had a significant impact on the consumption of closely connected and clustered services such as optional consumption and offline retail; second, the epidemic has hindered the construction progress of related fixed asset investment projects, resulting in a slowdown in the growth rate of the final capital investment formation; third, the impact of the epidemic on the domestic supply chain system, superimposing the situation in Russia and Ukraine, which has aggravated the differentiation of China's upstream and downstream industrial production; fourth, the transmission effect of the epidemic on economic growth has led to an increase in the difficulty of employment of key groups. The number of employed people in the service industry has decreased; fifth, the spillover benefits of the epidemic have catalyzed the weakening of market expectations, hindering the sustained recovery of final consumption expenditure. Looking forward to the second quarter, the author expects that macro policies will continue to focus on "wide finance, loose credit, and stable expectations", and the five impacts caused by this round of epidemic will show three changes along with the policy force in the second quarter: first, consumption growth will pick up and turn positive, and the overall consumption level will be weakly recovered; second, the supply chain will be further repaired, and infrastructure investment will continue to concentrate on stabilizing economic operation; third, the marginal improvement of major economic sectors is expected to weaken, and epidemic prevention and control will continue to be the core work of improving expectations.
Consumption growth will pick up and turn positive, and the overall consumption level will recover weakly. Under the impact of the epidemic, the total retail sales of consumer goods in March fell by 3.5% year-on-year, compared with the year-on-year increase of 6.7% in January and February, a significant decline. The revenue of the catering and tourism industry has fallen sharply, and the growth rate of consumption of optional commodities such as gold and silver jewelry, sports and entertainment, textiles, shoes and hats, automobiles, home appliances and furniture has also declined to varying degrees. However, demand for essentials in the household sector rose sharply, with food, beverage and medicine consumption all growing by more than 10 percentage points year-on-year. Judging from the historical data of the spread of the epidemic, the peak period of this round of the epidemic has begun to appear, and the new cases in the next 1-2 months may decline, but considering that the dynamic zeroing policy requires rapid and strict prevention and control of local clusters of epidemics, it will still take some time for the national flow of people to return to the level before the outbreak of this round of epidemics. This means that the daily travel and life of urban residents will continue to be restricted in the next 1-2 months, and the decline in the flow and gathering of people will continue to affect the service industries such as catering, retail, entertainment and real estate sales. Although the epidemic has boosted consumer demand for medical services, medical equipment, and online retail to a certain extent, only a partial substitution has been formed for offline consumer demand, and the buffer effect on the decline in total demand is limited. In addition, the national "city policy" is entering a period of relaxation, but due to the impact of the current round of epidemics, the source of funds for real estate development has intensified and deteriorated. At the same time, the uncertainty of the growth rate of residents' disposable income has risen, weakening residents' willingness to buy houses. Entering the second quarter, the year-on-year decline in the national land purchase area and the land transaction and construction area of 100 cities was basically "waist cut", and the new land start and construction area were sluggish, and the further recovery of national commercial housing sales may have greater resistance. Therefore, we predict that the retail sales of consumer goods will remain negative year-on-year in April, but the year-on-year growth in social consumption will turn from negative to positive in May.
The investment side will continue to exert efforts, and infrastructure investment will stabilize economic operation. Fixed asset investment fell in March due to the weakening of real estate and manufacturing investment, but generalized infrastructure investment rebounded more than expected (10.5% in the first quarter of this year, and 11.8% in the month of March), reflecting the rapid progress of infrastructure projects since December 2021, of which infrastructure projects such as utilities, water conservancy and public facilities accelerated in March compared with January and February, but the investment in transportation and logistics warehousing affected by the epidemic has slowed down. Although the epidemic has made the landing of some infrastructure projects slow, and it is difficult for actual infrastructure investment to rebound in the short term, the author remains optimistic about the growth rate of infrastructure investment. First of all, according to the recent requirements of the Ministry of Finance, the unused special bonds issued last year should be disbursed and used before the end of May this year, and the preparation time for the corresponding projects of this year's special bonds is 3 months earlier than last year, which means that the reserve funds for the landing of infrastructure projects are relatively abundant. Secondly, the Ministry of Finance revealed at the State Council's regular policy briefing that various localities have reserved a total of 71,000 special bond projects in two batches, and the number of infrastructure projects is sufficient. Finally, the Ministry of Finance and the National Development and Reform Commission are actively guiding local governments to establish a cross-departmental coordination mechanism, which will accelerate the preparation and guidance of infrastructure projects during the epidemic. For example, the state has issued the "Special Debt Fund Performance Management Measures", follow-up projects will be prepared in accordance with the new regulations, and it is expected that the project compliance rate and landing speed will be higher than in the past. If the epidemic is further controlled, the author believes that the landing of infrastructure projects will gradually accelerate, and the order volume of follow-up infrastructure enterprises may increase significantly in May and June, and the growth rate of infrastructure construction this year is expected to achieve an average growth level of 7.5%. In addition, the impact of the current round of the epidemic on the domestic supply chain is obvious, which restricts the further investment expansion of manufacturing enterprises, superimposes the transmission impact of the situation in Russia and Ukraine, and the price factor leads to the expansion of the differentiation of upstream and downstream production in the industrial manufacturing industry. However, the growth of investment in high-tech manufacturing still shows strong resilience, reflecting that the domestic manufacturing industry is continuing to move in the direction of high quality. It is expected that in the second quarter, the high-tech manufacturing industry will continue to maintain high growth, thereby supporting The steady progress of China's economy.
Marginal improvement is expected to weaken, and the epidemic will remain the biggest challenge. Under the influence of the complex foreign economic situation and the repeated domestic epidemics, it is expected that the weakening will be marginally improved, but it is still necessary to be vigilant against the spread of the weakening trend. From the perspective of household sector expectations, in the short term, taking into account the widespread spread and susceptibility of Olmi kerong, the decline in consumption expectations related to clustering and density will inhibit the rise in final consumption expenditure, thereby weakening economic growth expectations. From the perspective of corporate sector expectations, the repeated outbreak of the epidemic may lead to greater uncertainty in the domestic supply chain system in production, manufacturing, processing and logistics, and the expectation of corporate investment expansion will weaken, further leading to a decline in the willingness of corporate credit expansion. Judging from the expectations of the job market, the number of rural migrant workers in the first quarter increased by 2.2 percentage points year-on-year, reflecting that the first quarter of this year is the peak recruitment season. However, under the impact of the epidemic, the employment pressure in the labor market has emerged, the survey unemployment rate in large cities is higher than the overall urban survey unemployment rate, and the unemployment panic may increase the personal saving willingness of employees of small and medium-sized enterprises, which is not conducive to promoting consumption. From the perspective of global market expectations, the continued complexity of the situation in Russia and Ukraine, the high inflation volatility in the United States and the spillover effect of tightening global macro policies will affect the stability of China's economic and financial market expectations, or will increase the potential for expectations to weaken. The author believes that the core of reversing the expected weakening in the short term will still effectively control the spread of the epidemic, and it is expected that the central government will still take the prevention and control of the epidemic as the primary task in the second quarter.
It is expected that the loose credit of the wide fiscal will be stable, and the policy of stable growth will increase its efforts. Although the growth rate of social financing increased significantly in the first quarter, the financing needs of the real economy reflected that the financing needs of the real economy were still weak, and the funds invested by the People's Bank of China through the reduction of the RRR stayed more within the commercial banking system, making it difficult to effectively support small and medium-sized enterprises. Therefore, active fiscal policy will continue to play a more important role in directly supporting investment and consumption activities. In terms of "wide finance", from the perspective of fiscal expenditure in the second quarter, it is necessary to continue to support infrastructure enterprises to accelerate their work, stabilize economic growth, and use direct and targeted transfer payments and financial subsidy policies to simultaneously support small and medium-sized micro and small enterprises and low-income household departments that have been seriously affected by the epidemic. From the perspective of fiscal revenue, it is necessary to continue to optimize the structural tax reduction and rebate policy, focusing on the tax rebate policy for small and medium-sized enterprises, and focusing on tax reduction (enterprise income tax) policy support for state-owned enterprises. In terms of "loose credit", monetary policy needs to actively cooperate with fiscal policy. With the further emergence of downward pressure on the economy, further relaxation from the level of interest rates, reduce the financing costs of financial markets, and promote credit delivery by financial institutions, so as to effectively realize the situation of investment with consumption. In terms of "stabilizing expectations", alleviating the anxiety of large and micro enterprises and the public about the epidemic is the basis for improving expectations to weaken. It is necessary to do a good job in ensuring people's livelihood, and while adhering to the dynamic zero-zero policy, increase financial subsidies and medical security for low-income people, women and young children in areas affected by the epidemic.
(Chief Economist of ICBC International in Cheng Shi Department, Senior Economist of ICBC International in Zhang Hongyan Department)
This article originated from China Banking and Insurance News