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China’s COVID-19 Recovery could tell us what’s ahead for Canada

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While some Canadian provinces have begun the slow process of re-opening, it’s likely going to be a long recovery.

Many challenges lie ahead for Canadian businesses, among these lower customer demand, substantial regulatory changes, supply chain disruptions, abrupt shift to digital, and increased uncertainty.

As some economies are beginning to lift lockdown restrictions, China’s data for Q1 gives us an idea of what the economic recovery might look like for other economies around the world.

China has now reopened a large percentage of its economy during the pandemic. On the bright side, the manufacturing sector is back up, and Chinese production is recovering fast.

The bad news is that the demand side is still very weak. Chinese consumers are slow to start spending again and foreign demand has been altered. The Chinese recovery will most likely be weighed down by weak domestic and foreign demand.

What the data shows us about China

  • China’s GDP data for Q1 revealed a contraction of 10.7% on a seasonally adjusted quarter-on-quarter basis.
  • Sectors relying on physical presence or contact were the most affected. Chinese hospitality, retail and construction contracted the most in Q1, while information technology and finance continued to grow.
  • Industrial output contracted to 1.1% in March, much less than the 13.5% decline in January-February. This suggests that production is recovering quickly. Yet, rising inventories and falling profits means that the demand is struggling to peak up again.
  • Consumer spending has yet to significantly improve. Chinese retail sales show a 15.8% contraction in March, which is slightly better than the 20.5% contraction of January-February. Discretionary spending, including sales of cars, furniture and household appliances, took the biggest drop.
  • Labour market weakness in China is holding back part of the recovery in spending. Unemployment has spiked to 5.9%, but official data is probably underestimating the real loss in jobs. The Chinese unemployment rate measured using international standards could be more than 20%. In addition, disposable income fell strongly, which means that Chinese households lost part of their purchasing power.

What does it mean for Canada?

China’s data for March shows that even economies with less strict lockdown restrictions could experience huge economic consequences.

The slow improvement in household spending in China underpins that Canadian consumers are also likely to return slowly to their consumption habit once restrictions are lifted.

On the bright side, retailers and businesses that are adapting quickly to the context will come through. Key strategies have included a digital shift, new and innovative ways to engage with customers and business offers that are adapted to the new reality of consumers.

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