Outlook dims for China’s economic recovery

• Status of China’s Economic Recovery – The growth momentum that China saw in June was short-lived, with most key economic indicators in July having unexpectedly weakened. Behind this was a resurgence in COVID-19 cases and the consequent tightening of restrictions, as well as the ongoing property downturn. The strong likelihood of more COVID flareups, persisting weakness in property investment, and the slowdown in global growth mean that China’s economic recovery is likely to remain weak in the short-term. We have as a result decided to downgrade our GDP growth forecast for China in 2022 from 4.0 percent to 3.7 percent.

• Investment Trends –  Total fixed asset investment slowed down, driven by the continued contraction in property investment, as well as by a deceleration in manufacturing investment. The latter was likely related to growing concerns about the outlook for domestic and external demand, and, in line with this, July also saw a slowdown in industrial activity and a sharp drop in industrial profits. For its part, investment into infrastructure development continued growing steadily on the back of strong policy support. With no end in sight to China’s property downturn, subdued domestic demand due to the impact of COVID-related restrictions, and weakening external demand due in part to inflationary pressures, we expect that investment growth will continue facing downward pressures going forward. 

• Consumption Trends – Growth in retail sales moderated after June’s rebound, mostly due to the resurgence in COVID cases. This also shows that stronger measures than the local governments’ voucher programs will be required to successfully offset the consumption slump. The consumer price index (CPI) saw a slight increase in July, and it is expected to continue rising for the remainder of the year due to inflationary pressures on food prices. But we think the increase in prices is likely to be moderate due to ongoing subdued demand. Inflation in the short-term will therefore not be a key concern for Chinese monetary authorities, giving them room to further loosen monetary policy if needed. 

• Trade Trends – Strong export growth continued in July, bolstered by firming demand in EU and Asian countries for intermediate and capital goods. Nevertheless, our view is unchanged regarding a rapid deceleration in China’s export growth later this year, given the bleak global outlook for Q4 2022 and 2023.

Implications for Business

We decided to downgrade our GDP growth forecast for China for the full year of 2022 by 0.3 percentage points, from 4.0 percent to 3.7 percent. This is to account for a weaker-than-expected economic recovery in 2H 2022 due to two main factors:

To be clear, our previous forecast of 4.0 percent already accounted for the impact of China’s property downturn.

We expect the zero-COVID restrictions to start easing in 2023. One of the reasons is that China is making progress in the production of domestically-developed mRNA vaccines and antiviral Covid medication. Once these are broadly distributed, authorities may feel more confident about relaxing restrictions. It is also likely that the incentives to maintain a stringent approach towards COVID will diminish after the ‘Two Sessions’ meeting in March 2023. A relaxation of lockdown measures and social distancing restrictions will give room for services activity to recover. We also expect new home sales and property investment to rebound in late 2022 / early 2023 driven by escalating policy support, though this rebound will not be strong. We have therefore decided to not change our forecast for China’s GDP in 2023, i.e., 5.3 percent.

But the risks to the outlook are tilted to the downside: the pandemic could impact the Chinese economy more severely than in 2022, especially if a new, more aggressive variant of the virus emerges. Meanwhile, the government’s policy measures might not be sufficient for China’s housing market to bottom out. There is also the possibility for the global economy to decelerate more than is currently expected. This is all further compounded by the deterioration of the geopolitical environment, including the ongoing war between Russia and Ukraine, and rising tensions between China and Western countries, especially the US. It is therefore imperative for MNCs to plan for persistent “down market” conditions over the short- to medium-term.