China's economy may be headed for deeper contraction on factory drop

China’s economy could be heading for a worse-than-expected first-quarter contraction after the country’s manufacturing sector reported activity was at a record low in February due to the coronavirus outbreak.

The manufacturing purchasing managers’ index plunged to 35.7 in February from 50 the previous month, according to data released by the National Bureau of Statistics on Saturday. Even before that data, the median forecast was that the economy would shrink in the three months through March from the last quarter of 2019, and the surprisingly weak data prompted further cuts to that view.

Gross domestic product may now shrink by 2.5% in the first quarter from the previous period, Nomura Holdings economists led by Lu Ting said in a report on Saturday after the data release. That was a cut from their previous forecast of -1.5% in a Bloomberg survey last week. Standard Chartered Plc already expected a -1.5% contraction before the data, while Australia & New Zealand Banking Group Ltd. is forecasting a 2% drop, according to reports after the release.

If the economy was to contract, it would be the first time that has happened in comparable data back to 2011.

Pacific Investment Management is another which sees the effects of the deadly outbreak causing a contraction, forecasting a 6% annualised drop in China’s first-quarter gross domestic product. Pimco’s view gels with Goldman Sachs Group economists who said in a report Friday that global GDP will shrink on a quarterly basis in the first two quarters of this year before rebounding in the second half.

The factory PMI data may improve in March, CICC analysts including Yue Yan wrote in a note on Saturday.

“Strenuous containment measures were taken after the outbreak of COVID-19, which understandably dampened economic activities in the short term,” they wrote. “With the outbreak gradually under control, government agencies have been clearing the unwanted obstacles for production resumption.”

Nomura’s Lu also expects the March PMIs to rebound, but says activity data will be zero or negative as businesses won’t be 100% back.

On a year-on-year comparison, the median forecast for first-quarter GDP growth is 4.3%. That was before Saturday’s data. Nomura and ANZ both now see it rising 2%, while Standard Chartered expects a 2.8% expansion.

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