China Q4 Better Than Expected, But
Bottom Line: December retail sales was much better than expected, which helped the Q4 GDP outcome. While scepticism exists over the outcome, exiting from the zero COVID strategy could have caused a boost in December. With fears over COVID looking to have already peaked, the more sustained pick-up in consumption could kick in Q1 rather than Q2/Q3 and produce some upside risks to our 2023 growth forecast.
Figure 1: 12mth Average of Nominal Retail Sales Growth for Consumer Goods (Yuan Blns)
Source: Continuum Economics
The Q4 GDP data and December monthly numbers were better than consensus medians with a much better than expected retail sales figure helping (-1.8% v -9.0% expected). The retail sales figure has caused some scepticism, as the December period was the period of peak fear over the COVID outbreak and some anecdotal evidence showed very quiet shopping centres in Beijing. The breakdown shows that car sales really helped in December, which is feasible if people feel that post reopening they are safer in cars than on public transport. Additionally, corporate reports have suggested strong e commerce sales in December as well. Thus while we are uncertain about the reliability of the December retail sales and hence the wider benefit to Q4 numbers, the reported number is feasible.
Economists are not overly worried however, as the reopening is expected to boost China economy in 2023. The key question is when this will occur. Public transport numbers, plus reporting in the media, suggest that the fear factor over the COVID wave is already less than December. If this resilience of sentiment by households can be sustained through the New Year celebrations starting January 21, then this could translate into better consumption numbers in February, rather than Q2 as we had originally thought.
Other countries did shows sharp acceleration in economic activity after the initial COVID wave in 2020. China is unlikely to repeat that, as recent restrictions have not been full province or national lockdowns like those in other countries in 2020. Even so, the zero COVID policy will likely have restricted consumption including for consumption services over the past few years and some pent up demand will likely be seen. As an illustration Figure 1 shows the outcome in nominal retail sales consumer goods and the trajectory if the 2013-19 trend had been maintained. The surge in bookings for overseas travel seen since the Dec 26 announcement back this idea. However, employment and income growth also need to recover before backing sustained consumption growth. This does create uncertainty for the 2023 outlook for China. We are not yet revising our forecast of 4.7% 2023 GDP growth upwards, but upside risks do now exist to our overall 2023 forecast and 2.0% Yr/Yr for Q2. We will review after the January numbers are released.