Headwinds Challenge China's Economic Outlook

Domestic and External Challenges Pose Headwinds to China’s Economic Outlook

While China’s economic recovery from COVID-19-related shutdowns in the second quarter of 2022 is expected to continue in the second half of the year, it will likely be challenged by weakness in domestic demand and a potential recession in the US.

The anticipated 2H 2022 China recovery will be underpinned by the government’s recent escalation of pro-growth measures, including massive tax reductions and aggressive expansion of fiscal spending, as well as monetary easing measures (e.g., lowering interest rates) which have resulted in ample liquidity levels in the market.

Nonetheless, the domestic demand recovery will likely be constrained due to several headwinds, including the likelihood of further COVID-19 outbreaks, given China’s dynamic zero-COVID-19 policy, whichsaps domestic demand and shrinks exports to trading partners like the US, and the ongoing housing market downturn, both of which will weigh on consumer confidence. Another reason for the weakness in demand recovery is the subdued global growth outlook, which will be partly driven by what we expect to be a shallow recession in the US in 2023. (See The Conference Board Economic Forecast for the US Economy.)

As a result, The Conference Board is cautious about the strength of China’s economic recovery in 2H and has revised down GDP forecasts for China from 4.2 percent to 4 percent in 2022, and from 5.5 percent to 5.3 percent in 2023. (See Economy Watch: China View (June 2022).)