Bottom Line: We feel that concerns of China’s recovery stalling are overdone and the recovery will come through in waves. We maintain our 5.8% forecast for 2023. However, long-term we do remain concerned that population aging will mean a peak in the labor force that is a big structural headwind to growth. China authorities will likely struggle to keep growth above 5% from 2025 onwards.
Figure 1: M2 Growth
Source: Datastream/Continuum Economics
April China manufacturing at 49.2 (below expectations), plus some global companies reporting earnings in China below expectations has prompted some questions of whether China recovery will fade after a great Q1. We have argued that the reopening in China would feedthrough in waves, rather than a huge burst of activity that occurred in U.S./Europe. Firstly, China’s authorities had not provided income support or transfers as occurred in DM countries and thus no huge excess existed in savings. Secondly, though most of China population embraced endemic COVID quickly, some parts of the population were always going to be slower to adapt after 3 years of COVID fear. Thirdly, China recovery will be supported by a pick-up in employment growth then income and consumption growth, but this will come through multi quarter. We maintain the view of 5.8% growth in 2023 from the March Outlook (here), helped by policy supporting including good money supply growth (Figure 1).
The latest set of monthly figures are scheduled for May 15 and will provide an insight on how April has started Q2. It is also worth noting that goods consumption could also grow slower than consumption services as the endemic COVID policy produces a switch in the consumption basket. Early report suggest that the May holiday week got off to a stellar start with estimates of strong national rail travel (here).
However, despite our optimism about the cyclical economic position 2023 and H1 2024, we remain concerned about long-term trend growth. We have long highlighted that population aging means that the labor force is peaking, with no easy solution in absolute terms (here for our long-term forecast). President Xi wants to prioritise solutions for this problem and was one of the objectives highlighted at the key The Central Financial and Economic Affairs Commission on Friday. However, labor market economists would highlighted that a couple of the normal solutions (immigration; increase the already high female participation rate) are unlikely. A pick-up of the rural to urban migration to normal 2010’s levels would however be helpful, as it boost productivity in the economy and makes up for sluggish labor force growth.
We also remain concerned that once the cyclical recovery fades, that weak private investment will also be a factor that drag on economic growth into H2 2024 and 2025. China government/company and household debt/GDP is too high (here) and will be a structural headwind to growth. Meanwhile, though the government is trying to be more constructive towards private companies, the business environment is not as free as the 1990-2015 period and this will mean less private sector business investment. Finally, global business are shifting away from China dominated supply chains for many reasons including U.S./China strategic competition. Overall, though we see 5.5% GDP growth in 2024, the authorities will struggle to achieve 5% in 2025.