China: Growth Forecast Revised Upwards
View change: We now forecast 5.8% GDP growth in 2023 versus our December outlook forecast of 4.7% helped by a quicker than expected exit from Zero COVID policies/quick adaption of China’s population and government policy being more supportive. We are also revising up 2024 to 5.5% versus 5.1%, both due to base effects and also as the shift to an endemic COVID policy is more widely expected than we previously thought.
Figure 1: Real GDP (change over year ago %)
| Headings; 'Up' Style | Q1 23 | Q2 23 | Q3 23 | Q4 23 | 2023 FY | Q1 24 | Q2 24 | Q3 24 | Q4 24 | 2024 FY |
| Previous Forecast | 2.0 | 4.0 | 7.0 | 5.5 | 4.7 | 5.5 | 5.5 | 5.0 | 4.7 | 5.1 |
| New Forecast | 3.0 | 7.5 | 6.5 | 6.0 | 5.8 | 5.5 | 5.0 | 5.0 | 4.7 | 5.5 |
Source: Continuum Economics
China Adapts Quicker to Post COVID World
A number of positive developments have prompted Continuum Economics to revise up its 2023 and 2024 GDP forecasts for China.
- Quicker exit from Zero COVID. The set of announcements starting in December have dramatically shifted away from Zero COVID towards an endemic COVID policy in China. The Chinese authorities have shown no U turns on this policy, despite an official surge in deaths from COVID to close to 60k up until January 12. A COVID booster campaign is underway and a drive to get the over 60’s full vaccinated as well. Estimates of infections vary, but a massive exit wave has occurred. This could cause some lingering dislocation in Q1.
- China population adapts to Endemic COVID. A 2nd positive surprise has been China’s population quick adaption to endemic COVID. High frequency footfall and travel data has recovered during January and February, with no large scale disruption during the New Year festival. An improvement in confidence has also been evident, with a snapback in January non-manufacturing PMI (Figure 2).
Figure 2: Non-Manufacturing PMI
Source: Datastream/Continuum Economics
- Policy Support. The Chinese authorities have tilted towards a more pro-growth stance, with fiscal policy spending and the major banks being encouraged to lend to help the recovery process – as seen in the January new loans data. Additionally, officials have signaled that the regulatory crackdown is now mature and business confidence is improving in the technology sector. Finally, a number of measures have been undertaken to help property developers manage through liquidity problems and undertake slow restructuring if required. Even so, policy is supportive rather than aggressive, as China’s authorities do not want to repeat the overstimulation seen in 2009-10. One key worry is that China’s total non-financial debt/GDP ratio is very high for an economy with its GDP per capita and that further excessive borrowing could cause debt problems and a structural growth slowdown.
H1 2023 higher and H2 Still Good
The effects of these developments is for an upward revision in our Q1 and Q2 GDP growth forecasts to +3.0% and +7.5% Yr/Yr (Figure 1). Q1 will be impacted by the transition away from zero COVID, but should look better due to the greater willingness of China’s population to adapt to an endemic COVID policy. Confidence can build further into Q2 when the real benefit should be seen in spending and consumer services. A switch away from goods spending to consumer services and travel could be seen as well and cause some divergence in the consumer picture. H2 should then hold up well, as the economic recovery translates into job growth and income growth. Though consumption has been suppressed and precautionary savings have increased, GDP growth needs jobs growth to pick up as well. Rural to urban migration also needs to accelerate to 2015-19 levels to help medium-term labor supply growth and income/consumption growth.
Business investment in the private sector can also benefit from the reopening, with optimism also evident in the equity market (here). Even so, the private sector knows that the softening in government communications towards the private sector is not a return to the boom years of 1990-2015, as President Xi maintains the state socialism goals including common prosperity that means a less favorable structural backdrop for Chinese companies.
Net exports of goods and services will remain the weak link in 2023, with export prospects hurt by the slowdown in global growth and imports holding up better due to some pick-up in domestic consumption. China tourist numbers abroad will also recover, which will be a drag on the external side.
Overall, we now forecast 5.8% GDP growth in 2023 versus our December outlook forecast of 4.7%. We are also revising up 2024 to 5.5% versus 5.1%, both due to base effects and also as the shift to an endemic COVID policy is more widely expected than we previously thought. However, we remain concerned about structural growth prospects in China from 2025-30 and we maintain the view that 2023 and 2024 will see a cyclical bounce, but then growth will slow to 5.0% in 2025 and then down to 3.0% by 2030 (here).