Key Takeaways
- China's tough fourth quarter amid COVID outbreaks implies unfavorable "carry over" for 2023 GDP growth.
- Nonetheless, we believe the economy remains on track for 4.8% GDP growth in 2023, in line with our November baseline.
- China's earlier and speedier COVID policy shift should bring forward the recovery of domestic demand, especially private consumption.
- The re-opening of China's economy will increase price pressures domestically and globally. But China's consumer inflation is likely to rise much less than in the U.S. and Europe in 2022.
The poor end to last year won't cast a long shadow on China's economic path in 2023. S&P Global Ratings believes the accelerated re-opening of the economy and end of zero COVID keeps GDP on path for 4.8% growth this year.
Mobility is already increasing after December's surge in infections disrupted activity following the COVID policy shift in late November. The abrupt removal of restrictions, testing, and quarantine led to a spectacular surge in cases across the country. This depressed mobility, spending and production in December as people fell ill or exercised voluntary social distancing.
While economic activity at the end of 2022 was weaker than in our November baseline, we don't think the "negative carry" will derail our forecasts for this year. In our view, consumption will lead the recovery with investment and exports more muted.
What The Tough 4Q Means For China's Post-Restrictions Recovery
For much of the fourth quarter, widespread Covid outbreaks led to restrictions and lockdowns across the country that hammered mobility, consumer spending and confidence. However some of the hardest-hit segments in the quarter, including consumer spending, will lead the recovery.
Nominal retail sales fell 1.8% year on year in December; the decline would have been larger had it not been for hoarding of food and household essentials and high spending on medicines (see chart 1).
Nominal fixed asset investment expanded 3.1% on a year ago. Because of the really poor mobility the housing market took another turn for the worse, with housing sales down almost 30% year on year. Exports held up quite well at the end of 2022 on a sequential basis (see chart 2), even though a high base in late 2021 resulted in significant year-on-year decline of shipments. In all, real industrial production growth slowed to 1.3% on a year ago.
Chart 1
Chart 2
GDP was flat in the fourth quarter, on a quarter-on-quarter basis (see chart 3), resulting in a slowdown in year-on-year growth to 2.9%, from 3.9% in the third quarter (see chart 4), with household consumption particularly weak. GDP growth for 2022 as a whole came out at 3.0%, somewhat lower than our previous projection of 3.2% and significantly below our estimate of potential GDP growth of around 5% (see "China's Trend Growth To Slow Even As Catchup Continues," published on RatingsDirect on Nov. 9, 2022).
The weak end to 2022 reduces the economic momentum going into 2023--the disappointment in the fourth quarter constitutes a negative "carry over" of 0.7 percentage points for 2023 GDP growth.
Chart 3
Chart 4
Revived Mobility Will Boost Consumption
Following the peaking of infections, mobility has been recovering since late December and production disruption has eased. Based on high frequency indicators on road congestion and subway usage, mobility is on track for the average in January to exceed that for December and the average for the first quarter should exceed that for the fourth quarter of last year. While spending probably lags mobility, this suggests the reopening recovery has already started in January, significantly earlier than we had assumed in our November baseline.
While major easing of fiscal or monetary policy is unlikely, signs suggest economic policymakers have started to focus more decidedly on supporting growth. Local government bond issuance seems on track to be relatively generous and monetary conditions should remain accommodative until the recovery has matured and inflation pressures build up.
Moreover, the recent U-turn in property policy should help stabilize activity in the housing sector this year. Policy adjustments include a major easing of restrictions on bank lending to property developers, arranging additional financing support to them as well as lower mortgage rates and easing of home-purchasing restrictions. In addition, there are signs that policymakers want to be constructive to private sector development and the tech sector.
We now expect a pick-up in quarter-on-quarter growth from the first quarter onwards; the bumpy expansion pattern in recent years implies a choppy forecast for year-on-year growth. Consumption should be the biggest driver of growth in 2023, supported by a deployment of some of the excess savings accumulated in recent years,.
While real estate investment should bottom out later in the year and infrastructure structure investment should expand further, sluggish manufacturing investment is likely to contain overall investment growth. And with little to no economic growth in the U.S. and the eurozone, slow external demand this year is a headwind for exports.
Nonetheless, combined with the shift of policymakers' focus to growth and more support to the property sector, the faster-than-expected re-opening means that, despite the setback in the fourth quarter, the economy remains on track for 4.8% GDP growth in 2023, in line with our November baseline.
China's Post-Opening Inflation Won't Be As Severe As The West's Was
The re-opening of China's economy will increase price pressures domestically and globally. Rising mobility and economic momentum in China and eventual stabilization of its housing market are likely to stretch global energy and commodity prices. Domestic price pressure is likely to manifest itself especially in contact-intensive services, where many companies may struggle to expand operations enough to meet the sudden rise in demand.
But China's consumer inflation is likely to rise much less than in the U.S. and Europe in 2022. On the energy and commodity price front, the impact of China's re-opening in 2023 will be substantially smaller than that of the re-opening of the rest of the world and the Russian invasion of the Ukraine in 2022. Domestically, most goods markets in China face oversupply. Moreover, the overhang of "excess saving", while significant, is substantially smaller than in the U.S. and Europe, mainly because the government has largely abstained from providing fiscal support to households during the COVID period. Relatedly, only a sustained period of strong growth will absorb the un- and underemployment on the labor market.
One downside risk to this forecast is that lingering concerns about infections or the economy prolongs the suspension of activity and spending. Another downside risk to growth is an earlier turn to less accommodating fiscal and monetary policy, for instance if inflation were to pick up significantly. The key upside risk is that we underestimate the buoyancy of domestic demand after the reopening.
Related Research
- China's COVID Wave: Q1 2023 Will Be Critical, Dec. 22, 2022
- China's Trend Growth To Slow Even As Catchup Continues, Nov. 9
This report does not constitute a rating action.
| Asia-Pacific Chief Economist: | Louis Kuijs, Hong Kong +852 9319 7500; louis.kuijs@spglobal.com |
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