China’s GDP collapse is a taste of what is to come for the rest of the world

It was not surprising. But it was still shocking – and a likely indicator of what is to come for the rest of the world.

Activity in the Chinese economy – the second largest in the world, indeed by some measures already the largest – fell by almost a tenth in the first three months of this year as a result of various state-imposed lockdowns to suppress the spread of coronavirus through the world’s most populous nation.

Most headline reports cite the 6.8 per cent fall in activity based on measuring activity relative to the same quarter a year earlier.

But the quarter-on-quarter figure – a more familiar way of reporting activity in the west – showed an even more ominous decline: a 9.8 per cent drop.

Regardless of which measure is used this is record-book bad. China has only produced quarterly data since 1992. Economic historians are saying that this is likely the first contraction in Chinese GDP since 1976, during the social chaos that followed the death that year of Mao Zedong.

Even during the great global financial crisis of 2008 – which saw global trade, China’s economic lifeblood at the time, plummet like a stone – the country’s quarterly GDP rate never dipped into negative territory. A historic surge in lending by state-owned banks during that emergency kept the Chinese economy moving.

Yet of course this time is different – and by design. The Chinese government, this time, is deliberately suppressing economic activity across the country rather than desperately trying to keep it from declining through stimulus measures.

It’s possible to argue that the collapse in Chinese GDP is the flip side of the effectiveness of their anti-coronavirus lockdown, that it represents the success of the communist regime in Beijing rather than some kind of legitimacy-sapping failure.

And next? Analysts, looking at the monthly breakdown of the figures, see signs of a pick-up in March. The total lockdown of Wuhan – where the virus originated – has since been lifted.

China’s exports will almost certainly be weaker over the coming quarters as the impact of the later lockdowns of many of their customers in Europe and the US hits.

Exports, though, had long since ceased to be a big driver of China’s GDP growth.

Yet even with a big domestic bounce in the coming quarters – as hundreds of thousands of factories fire up and hundreds of millions of consumers open their wallets again – China’s overall GDP growth for 2020 will most likely be lower than the previous year, which, at 6 per cent, was, already, the weakest since 1992.

Two big question marks hang over China’s economic future. The first is whether the country is actually over the Covid-19 nightmare, or whether it will see a second disease outbreak, as some fear. That would be a chilling development for western economies hoping to exit lockdowns in the coming months.

The second is how this rupture will impact the country’s great economic shift away from unsustainable debt-driven investment. Could it accelerate that necessary, though politically destabilising, transition? Or might it kill off that economic rebalancing project? What would then take its place?

The rest of the world has a profound reason to take an interest in the answer to these Chinese questions.