Posted: 21 Jul. 2020 5 min. read

China delivering a V-shaped recovery

Weekly economic briefing

Newly released economic data from China indicates that the world’s second largest economy is experiencing what most countries can only dream of - a V-shaped COVID-19 recovery.

As the first to be struck by the virus, China’s economy suffered the earliest blow – and after decades of strong growth, its behemoth economy shrunk by 6.8% in the March quarter. Industrial production plummeted 14% in the first two months of the year, while retail sales were down 21%, and demand for imports slowed, including Australia’s coal and iron ore.

However, to the envy of other economies, China has bounced back quickly, recording 3.2% year to GDP growth in the June quarter, driven in large part by its relatively fast virus containment.

Much of the economic speculation around the world is when will economic activity/spending/employment get back to pre-COVID levels, with one to two years a common timeframe. Based on its GDP data, China is already there.

While global COVID-19 infections were rising quickly in March, Australia included, the number of new cases in China was already dropping notably. Movement restrictions were loosened, and industry activity picked up, demonstrated by China’s renewed coal consumption. Foot traffic returned to public transport and shopping centres. Then came US$500 billion in fiscal support, which has particularly helped to drive an expansion in industrial activity.

This turnaround was extraordinarily fast, with real GDP growing 11.5% between the first and second quarters of 2020.

Digging deeper, both manufacturing and services have been important to China’s recovery, as shown by its Purchasing Managers’ Indices (PMI) for services and manufacturing, which have both climbed above 50, indicating expansion, while the rest of the world lags and continues to contract. In the year to June, Chinese manufacturing rose 5.1%, with advanced manufacturing rising 10%, while services recovered from a shocking February to be 1.9% higher in the year to the June quarter. Finance and information technology were particularly strong performing industries.

Chart 1: China and Global Purchasing Managers’ Index (PMI) (2019-20)

Source:  Thomson Reuters


Yet, China’s economy still shouldn’t be considered the epitome of post-COVID health. Its recovery is a lopsided one, and according to Deloitte Global Chief Economist, Dr. Ira Kalish:   

It appears that the economy’s strength derives from strong growth of the industrial sector, largely driven by government investment in infrastructure as well as strengthening of exports. Yet consumer spending appeared to remain weak, with retail sales declining. Evidently, consumers remain wary of social interaction given that the virus has not gone away. 

While production for exports has risen, global demand for Chinese exports remains weak. Perhaps the biggest challenge for China’s economic recovery is negotiating a safe passage in an external environment characterised by a very weak global economy.

Even though China’s recovery is more industrial driven than broad-based, and virus risks continue, it has nevertheless been good news for Australia.

Yes, borders remain shut to tourists and international students, but China’s renewed industrial activity is providing valuable support for Australian exports, particularly coal and iron ore. In the past three months, iron ore prices have risen 33% to US$107/metric tonne, and there’s further upside there, as COVID-19 related supply chain disruptions intensify in Brazil.


Chart 2: Iron ore (62% Fe fines) shows resilience (Jun-17 to Jul-20)


More about the authors

David Rumbens

David Rumbens

Partner, Deloitte Access Economics

David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis.  David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.

William Mullins

William Mullins

Graduate, Deloitte Access Economics

William is a Graduate Economist working in Deloitte Access Economics’ Macroeconomic Policy & Forecasting team. Prior to joining Deloitte, William completed a Bachelor of Commerce Honours at the University of Melbourne majoring in Economics and Finance.