What are the implications of China’s reopening for the global economy?
After what has felt like a constant period of negative economic shocks and forecast downgrades as the world has lurched from one crisis to another, we have become less pessimistic about the outlook for the global economy.
During our latest forecast round, we have revised up our projection for global GDP growth to 1.9% in 2023, from 1.3% previously, with a slight pick-up to 2% in 2024. Inflation has peaked decisively, and we have lowered our projections at the global level to 4.7% in 2023, down from 7.6% in 2022, and expect further gradual declines towards target in 2024.
Better growth means that interest rates in the US and Europe may rise a bit further in the near term. However, we continue to anticipate rate cuts through 2024.
Outlook for China decisively better as the country reopens
The outlook is decisively better for China after the government’s relaxation of its zero-Covid policy in late-2022. Measures to control the spread of the virus have been abandoned far more quickly than anyone assumed possible.
The early indications are that mobility and activity began to rapidly normalise once restrictions were lifted (chart 1).
Our baseline forecast for China now assumes three consecutive quarters of above-trend growth starting in Q1 2023 skewed towards services. We think that will lift GDP growth from our previous forecast of 5% to around 6.2% in 2023.
However, some leading indicators such as the credit impulse have already begun to decline, consistent with a loss of momentum in late summer.
As such, barring another round of stimulus or rapid credit growth sufficient to drive a turnaround in leading indicators, we think GDP growth will ease back to 4.5% in 2024.
Stronger China will raise global growth, but the spill-over may be limited
Faster growth in China mechanistically raises our global forecast. After all, China accounts for roughly one-fifth of global output, meaning that every 1 percentage point increase in GDP growth automatically adds 0.2 percentage point to the world aggregate.
China’s heavy reliance on imports means there should be more spill-over to the rest of the world. However, a recovery skewed towards services ought to be less commodity-intensive than a construction boom, with demand geared more towards energy rather than metals as mobility increases.
So, whereas past recoveries in China have benefitted metals exporters in regions such as Latin America and Africa, it may be energy producers than are the winners this time as import volumes pick up.
Less pessimistic on outlook for developed markets, but more for domestic reasons
Despite most warning signs flashing red, the US has continued to defy gravity. We still think that higher interest rates, which we now expect to peak at 5.25% in the second quarter of 2023, will lead to a recession. However, it is likely to be relatively short and shallow. A period of below-trend growth should still bring inflation down over the forecast horizon, allowing the Federal Reserve (Fed) to pivot back to rate cuts in late-2023 to a trough of 3.25% by mid-2024.
The eurozone is set to avoid recession after some respite from the energy crisis. Inflation should fall back more quickly, relieving some of the pressure on real incomes. The eurozone economy is likely to be largely stagnant, meaning that while the European Central Bank (ECB) may raise rates a bit further in the near term, it is also likely to cut in 2024.
By contrast, the UK still faces a recession as higher inflation and interest rates, along with austere fiscal policy, dampen the outlook. We think its GDP will contract by 0.8% in 2023. Interest rates may have already peaked with cuts likely in 2024.
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