China Set to Post the Slowest Growth in Two Years on Zero-Covid Policy

Economists polled by The Wall Street Journal predicted that China’s gross domestic product expanded by less than 1% in the April to June quarter, compared with a year earlier. Official quarterly output numbers are due to be published Friday morning in Beijing.

If the economists’ forecasts are correct, it would mark the worst performance since the first quarter of 2020, when the pandemic first erupted and the economy shrank 6.9% after the Central Chinese metropolis of Wuhan became the first city in the world to lock down to stem the spread of Covid-19.

A modest recovery is now under way, sparked by the easing of public-health restrictions, which has released pent-up demand for Chinese goods and services, official data show. But already, there are warning signals about the future in the labor market, and from business and consumer surveys.

Even with some post-lockdown recovery, China is on course for a low-growth year, economists say. This would deprive the global economy of a dependable engine of expansion at a time when rising interest rates and soaring inflation is squeezing growth in the U.S. and Europe.

“If other important parts of the global economy remain weak or go into recession, it seems highly unlikely that China can become a locomotive for global growth as was the case after the global financial crisis,” said

Jonathan Ashworth,

senior China economist in London at Fathom Consulting.

Beijing earlier this year set a goal of expanding around 5.5% in 2022. Most economists think it might muster about 4%.

On a quarter-to-quarter basis, most economists expect China’s economy to shrink in the second quarter for only the second time since comparable records began in 2010, highlighting the damage caused by lockdowns that closed factories and disrupted farming in the northern province of Jilin and elsewhere.

For two months, millions of Shanghai residents were also confined to their homes and many businesses closed as authorities tried to snuff out a coronavirus outbreak in China’s wealthiest city.

Most of the second-quarter hit was concentrated in April, when lockdowns were at their most widespread. Retail sales plunged by an annual 11.1% in April as stores closed and shoppers stayed home, according to data already published. Industrial production shrank 2.9% as factories fell idle.

Sportswear maker

Nike Inc.

said 60% of its business in China was affected by lockdowns during its fiscal fourth quarter, which ended May. 31. Executives told analysts on an earnings call that fourth-quarter revenue fell 20% compared with a year earlier after adjusting for currency fluctuations, while earnings before interest and tax were down 55%.

For some businesses, the disruptions persisted beyond the shutdowns.

Roy Huang,

who runs fiber-optic equipment maker Shenzhen DYS Fiber Optic Technology Co., Ltd. said that even after the southern city of Shenzhen exited a lockdown in March, workers still couldn’t return to his factory because of travel restrictions.

“Our production was greatly affected by the epidemic,” said Mr. Huang, who estimates his capacity fell by half between February and April. His profit was also squeezed by rising costs for transport and raw materials, he said.

China lifted restrictions in most areas by May, though Shanghai stayed under lockdown until the beginning of June. The reopening helped some economic activity recover: exports surged in May and again in June as factories reopened and ports cleared a backlog of orders.

Economists expect Friday’s figures to show industrial output picked up last month and fixed-asset investment expanded as the government stepped up infrastructure spending.

Still, some analysts believe a weak reading for the second quarter probably understates the extent of China’s slowdown. Research firm China Beige Book said in a report this month that its data, based on more than 4,000 interviews with firms in China, suggests a more tepid post-lockdown recovery than the official data indicate.

Retail sales were feeble in the second quarter and manufacturing slowed sharply, the company said. Weak signals from transportation, construction and commodities all suggest a promised boost to the economy from lavish fiscal spending didn’t arrive, while anemic demand for loans suggests monetary policy didn’t provide much of a lift either, it said.

For the fifth straight quarter, 14% to 16% of firms surveyed had sought new loans in the April to June period, China Beige Book said, compared with around 30% a quarter in 2019.

The country also is in the grip of a real estate slump as developers struggle with heavy debts. Exports, which powered China out of its first Covid-19 slump in 2020 and again in 2021, are expected to weaken as Western consumer spending slows.

Already, data from export powerhouses such as Taiwan and South Korea suggest foreign demand for manufactured goods is starting to fade. In China, business surveys showed that a gauge of manufacturers’ export orders in June remained below a threshold that signals order books are expanding rather than shrinking.

Above all, economists say a pandemic policy in which any Covid-19 outbreak is to be smothered with sharp restrictions on daily life means that consumers are hesitant to spend and businesses are nervous about investing and hiring. An index of consumer confidence in China was down 29% in May compared with January.

Joblessness among workers aged 16 to 24 in May also reached a record 18.4%. Economists and policy makers fret about youth unemployment because it can have long term effects on workers’ skills and productivity, which can squeeze an economy’s potential for growth.

Katrina Ell,

a senior economist on China at

Moody’s

Analytics in Sydney, said the high rate of youth joblessness suggests firms aren’t willing to take on new staff and invest in training amid the uncertainty created by the government’s zero-covid approach.

“There’s an ongoing reluctance to invest in the future,” she said.

—Bingyan Wang in Beijing contributed to this article.

Write to Jason Douglas at [email protected]