China 2023 Outlook Cut to 4.9%

Our Forecasts

China H2 Difficulties 

We are revising down our 2023 GDP forecast to 4.9% from 5.5% for a number of reasons (see Our Forecasts).Key issues include 

• Q3 economic momentum is slowing versus Q2, with a further slowing of retail sales activity and a larger drag from declining residential investment. We look for a 0.4% quarterly rise in Q3 compared to 0.8% in Q2 and the post COVID jump of 2.2% in Q1. This is a very weak pace of growth for China, as Q3 will likely see a worsening of the property developer’s crisis and this will hurt construction activity and associated production in the cement and steel sector. Separately, the slowdown in exports is the most important issue in net trade and suggests a drag from the external sector for China GDP in Q3. Consumer spending will likely slow in Q3, but at less of a pace as some residual benefit from the reopening still helps eating out and tourism. This quarterly slowdown would mean that the Yr/Yr rate slows to 4.0% from 6.3% in Q2.
• We look for 0.7% in Q4 on a quarterly basis, as the PBOC pushes to ensure that credit growth is maintained which benefits Q4 rather than Q3 and helps with lower interest rates. Some pick up in fiscal stimulus should also come through in Q4 as well, given the signals from the July Politburo meeting. The Q4 Yr/Yr GDP rate would be 4.6% and this would mean the 2023 average at 4.9% versus our previous forecast of 5.5%.
• Downside risks surround the baseline forecast. For Q3, we could be underestimating the impact of the property construction decline and the drag from exports. Meanwhile, a lot has been said about consumer spending being hurt by low consumer confidence and a slack labor market post COVID, but the data is difficult to navigate and the retail sales data suggest slow real consumption growth rather than a consumer stagnation or recession. For Q4 onwards, the downside risks come from policymakers not reacting quickly enough to worsening credit risks in the property development sector and sections of the financial market (here). This could bring in renewed adverse economic headwinds. As we highlight in our scenario analysis piece on China debt hangover, the main alternative scenario is for a hard landing of the economy into 2024-25 that brings growth down to the 1-3% area for China (here) – we also increased the probability to 20-30%.Apart from 2020 such a hard landing has not been seen since 1967/68 and 1976.

Figure 1: Annual China Real GDP (%) 

Source: Datastream/Continuum Economics

• We have previously revised our 2024 growth outlook down to 4.0% reflecting the baseline adverse forces (here) and also reduced the 2023 and 2024 CPI inflation forecasts to 0.4% and 1.0% respectively given recent downside surprises (here). All of this means that more policy stimulus is required and we have brought forward an additional 20bps of MTF cuts from 2024 into 2023 (here). We then have penciled in a further 10bps cut for Q1 2024. The PBOC could cut interest rates still further and launch a QE program, as more aggressive monetary policy moves. However, we feel that the bias will be towards using quantitative guidance to the banking sector to sustain loan growth above 10%, as this is more direct and quicker to impact than aggressive rate cuts or QE. This can be directed towards LGFV’s and SOEs, if as seems likely private business and households are not looking to increase lending on the scale required by the authorities. The 19 systemically important banks can support lending provided that the authorities are proactive in resolving/forcing takeovers for weaker financial institutions. This can help support growth in 2024, though does not really boost growth given the cautious attitude in the private sector.