China’s Growth to Fall Sharply in 2020 Due to COVID-19; Recover in 2021

Gross domestic product (GDP) growth in the People’s Republic of China (PRC) is forecast to fall sharply this year as the economy grapples with the effects of the novel coronavirus (COVID-19) outbreak, before recovering in 2021, according to a new report by the Asian Development Bank (ADB) released today.

In its Asian Development Outlook (ADO) 2020, ADB forecasts economic growth of 2.3% in 2020 for the world’s second-largest economy, following 6.1% growth in 2019, before bouncing back to 7.3% growth in 2021. ADO is ADB’s flagship annual economic publication.

“Growth will slow substantially in the PRC this year, especially in the first half, as the economy continues to deal with the effects of the COVID-19 outbreak,” said ADB Chief Economist Yasuyuki Sawada. “Continued fiscal and monetary policy support, along with the eventual recovery of most of the sectors of the economy, can help revive growth momentum at the end of the year and the whole of next year.”

Data for the first two months of the year indicate double-digit contractions in industry, services, retail sales, and investment. The evolution of the COVID-19 situation is the main risk facing the economy. A new round of domestic infections or the further global spread of the virus could increasingly dampen investor sentiment, consumer spending, credit sustainability, and overall economic activity. Another risk is the possible revival of the country’s trade conflict with the United States in the absence of a durable deal.

The COVID-19 outbreak became a supply and demand shock for the country as people stayed home, businesses halted operations, travel became restricted affecting tourism, and supply chains got disrupted, among others. A special topic in ADO 2020 looks at the updated economic impact of the COVID-19 pandemic in developing Asia, first released by ADB on 6 March. A longer containment period of the COVID-19 outbreak would cost the PRC as much as $692 billion in economic losses.

Consumption will remain a key growth driver for the PRC economy in 2020 despite an expected slowdown in consumer spending due to the COVID-19 outbreak, plateauing household incomes, and higher commodity prices. Sectors such as retail, accommodation, transportation, and entertainment will also take a hit. Government spending, however, is expected to increase significantly, especially on health care. In 2019, consumption contributed 3.5 percentage points to the country’s GDP.

The outlook for the PRC’s labor market remains clouded due to the COVID-19 situation. This puts financial pressure on businesses of all sizes, both in providing help to their employees and in absorbing profit losses as operations halt. The country’s current account is forecast to record surpluses equal to 1.6% of GDP this year and 1.2% in 2021.

Consumer price inflation is forecast at 3.6% in 2020 on higher food prices, especially pork, and taper to 1.9% in 2021. Monetary policy is expected to become more accommodative, while fiscal policy is expected to be more supportive, including a further increase in new local government special bond issues.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.