MP Econ Issue 14: China’s First Quarter Economic Outlook

In this special feature, we are including our 1Q2023 Outlook. Excerpts of the takeaways and introduction are below; the full report can be accessed here.

Post-Covid Rebound Dramatic but Short

1Q2023 Key Takeaways:

• Contrary to some views, we believe the economic rebound will be most impressive in 1Q2023 and then peter out later this year. Put differently, we expect a “square root”-shaped growth (√) in 2023.

• Domestic and external constraints on the usual growth drivers—investment, exports, consumption, and stimulus—will likely generate stronger headwinds to growth than currently expected.

• In particular, the supposed “revenge spending” will likely have a modest impact on growth, as spending down excessive savings won’t have an outsized effect on boosting consumption.

• Fundamentally, Beijing appears unwilling to do much more beyond lifting Zero-Covid to buoy growth, so it is likely to set a more realistic growth target of ≤5% in March.

While consensus has priced in a 2023 economic rebound, we differ in that we expect an early and dramatic rebound in 1Q2023 that will then moderate for the rest of the year. This is largely because we believe the worst is already behind us when it comes to China’s surprising 180-degree turn on Zero Covid, with negative impacts on the economy concentrated in 4Q2022.

Official statistics put quarter-to-quarter growth in 4Q2022 at 0%. But because consumption and the trade surplus both contracted in 4Q, while investment was flat, growth may have actually dipped into negative territory.

Since then, transport data has rebounded strongly, suggesting the first wave of infections has peaked. Judging by China’s past experience of re-opening, the initial economic recovery tends to be strong, which is another reason we expect the majority of the damage from the late 2022 lockdown to be undone by the end of 1Q2023.

Looking ahead to the rest of the year, however, we exhibit more caution on growth prospects. We are not as convinced of the consumption boost story resulting from households spending down excess savings. Other growth drivers, too, will be constrained by both domestic and global factors.

Moreover, now that Beijing has gotten rid of the biggest constraint on growth, Zero-Covid, it expects the economy to bounce back without other interventions that could exacerbate debt risks. Since the central government does not seem willing to go the extra mile on stimulating the economy, it will likely set a more realistic rather than ambitious growth target of ≤5.5%.

As such, our bullishness on a strong first quarter won’t necessarily endure for the rest of the year. It is more likely for the economy to stall in the second half so that it ends up with a square root-shaped growth for 2023.

For full Outlook, download PDF or view online.

Houze Song is a fellow at MacroPolo. You can find his work on the economy, local finance, and other topics here.