The coronavirus pushed China’s economy into its first contraction in decades in the first quarter, with the spread of the disease around the world now leaving the nation reliant on fragile domestic demand to spur a recovery.

Gross domestic product shrank 6.8% from a year ago, the worst performance since at least 1992 when official releases of quarterly GDP started and missing the median forecast of a 6% drop. China’s economy hasn’t contracted on a full-year basis since the end of the Mao era in the 1970s.

Retail sales slid 15.8% in March as consumers remained wary, while investment decreased 16.1% in the first three months of the year. A brighter sign was the smaller-than-expected contraction in March industrial production of 1.1% as factories returned to work amid easing lockdowns.

Both retailing and factory output showed improvement from the nadir in the first two months, suggesting a stabilization in economic activity.

“We expect this recovery to continue,” said Louis Kuijs, head of Asia economics at Oxford Economics Hong Kong Ltd. “However, the upturn will be slowed down by lingering consumption weakness and sliding foreign demand.”

China’s markets held on to gains after the release as investors had already anticipated the weak data. The Shanghai Composite Index was up 0.9% at 12:30 p.m., while the Hang Seng Index climbed 2.3% in Hong Kong.

The economy was forced into a paralysis in late January as the epidemic that first started in Wuhan spread across the country. The economy remained shuttered for much of February with factories and shops closed and workers stranded at home. The process of resuming business has been slow and the return rate only inched up to around 90% at the end of March, Bloomberg Economics estimates.

To cushion the economic blow, China has unveiled a range of support measures and has increased fiscal and monetary support — although not on the scale of other nations.

A meeting of the Communist Party’s Politburo in the coming days may provide further signals as to the direction of policy support.

While exports fell less than expected in March as production capacity was gradually restored, economists warn headwinds lie ahead as the rest of the world shuts down and external demand diminishes.

“Most major economies are still in the lockdown stage,” Robin Xing chief China economist at Morgan Stanley Asia, said on Bloomberg TV. “As a result, growth in the second quarter will be shallow, just marginally above zero.”

On the positive side, the surveyed jobless rate actually declined in March, to 5.9% from February’s record 6.2%. That suggests China is so far avoiding the kind of job destruction seen in the U.S., where more than 5 million Americans filed for unemployment benefits last week, bringing the total in the month since the coronavirus pandemic throttled the U.S. economy to 22 million people.

Consumers Key

Much depends now on whether consumers regain a willingness to spend amid nervousness that the virus can stage a comeback as controls are relaxed. Evidence from the epicenter of the virus, Wuhan, suggests progress will be slow.

While factories around Wuhan are working around the clock to get back up to speed, the recovery of consumer-focused businesses won’t be straightforward. People are cautiously taking to the streets again, but they remain subject to curbs on their movements aimed at keeping the virus at bay.

Consumer caution “continues to restrain demand, and thus activity more broadly,” said Frederic Neumann, co-head of Asia economic research at HSBC Holdings Plc in Hong Kong. “This is reminder also for other economies of the arduous path to full recovery even after full lockdowns are removed. All this points to the need for a more determined policy push on both the monetary and fiscal fronts to ‘shock the system’ and get activity back up to its earlier vitality.”

–With assistance from Tomoko Sato, Yinan Zhao and Miao Han.