China throws off shackles of Covid with growth surprise
Consumer-facing sectors should see the most benefit from the release of pent-up demand, along with some improvement in the real estate sector
Authors
China’s economy was far more resilient during the Q4 “exit wave” from Covid than anyone had expected. And with high frequency indicators suggesting that activity has already begun to pick up sharply as the number of Covid infection has subsided, the near term outlook for the economy is good. Growth is likely to be stronger than generally expected and that should support further returns from local assets.
According to the official national accounts, China’s economy stagnated in the fourth quarter of 2022. That was better than the consensus forecast for the economy to shrink by around 1% as first lockdowns and then the total abandonment of the government’s zero-Covid policy disrupted economic activity. As a result, the annual rate of GDP growth slowed to 2.9% in Q4, from 3.9% in Q3, meaning that the economy grew by 3% in 2022 as a whole.
Most of the upside surprise in Q4 came from domestic demand. December activity data, which were published alongside the Q4 GDP figures, showed that fixed asset investment was resilient. But it was the consumer sector that fared much less badly than anticipated. Leading indicators such as the NBS non-manufacturing PMI had pointed to an even deeper decline in retail sales after a 6% decline in November. In the end, though, retail sales contracted by only 1.8% year-on-year in December.
In many respects, Q4 is already old news given that the removal of all Covid restrictions has brightened the outlook. Consumer-facing sectors should see the most benefit from the release of pent-up demand, along with some improvement in the real estate sector. High frequency indicators such as traffic congestion and domestic flight volumes suggest that this is already happening. This pushes us decisively towards our “China rapid re-opening” scenario that envisages GDP growth of 6-7% in 2023.
Better growth this year is unlikely to mark the end of the structural slowdown that began more than a decade ago. And unless there is a large expansion of credit in Q1, growth is likely to slow again as we head into 2024. However, the near term outlook is clearly better than had generally been expected and this ought to support further gains in local assets.
Interested to read more investment insights? Click here.
Important Information:
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.
Authors
Topics