The outlook is decisively better for China after the government’s pivot on zero-Covid policy (ZCP) late last year. Early indications from high frequency data and the January PMI surveys are that service sector activity has rebounded strongly. By contrast, the positive impact on manufacturing was capped by weak external demand while housing transactions have only muddled along after some initial improvement.
Recovery in China to be driven by services
This is likely to set the tone for the shape of the recovery. After all, it is China’s service sector that has really been hampered by ZCP over the past couple of years as restrictions curbed travel. “Revenge spending” on services has been observed in most economies around the world that have transitioned away from measures aimed to contain the spread of Covid, and China is likely to experience the same release of pent-up consumer demand.
However, a key difference to other economies – certainly major developed markets – is that households in China do not appear to be sitting on huge stock of savings that can be drawn down to fund a prolonged period of rampant consumption. While China’s savings rate has risen a bit, fiscal support has focused on helping the supply side of the economy rather than direct transfers to households, as was the case in the US, for example.
“Sugar high” recovery likely to fade into 2024
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, the “sugar high” will probably fade as the release of pent-up demand is exhausted, savings are spent and cyclical forces turn less favourable. We think GDP growth will ease back to 4.5% in 2024.
Limited spill-over to other economies
The positive spill-overs to other economies may be quite limited.
- Small Asian economies to benefit:
The return of Chinese tourists will boost other parts of Asia, but these are likely to be the small Asian economies that account for only a fraction of world GDP.
- European exporters may not benefit as much as in the past:
Europe would usually benefit from an upturn in China’s economic cycle as stronger growth stimulates investment by manufacturers in response to an increase in demand for goods. However, we expect the recovery to be skewed towards services, not manufacturing.
Furthermore, prior strong investment and soft external demand means that the recovery is unlikely to spur a renewed investment cycle in manufacturing that sucks in imports from Europe and the rest of the world. Finally, while ZCP may have delayed foreign direct investment (FDI), it is not clear if multinationals will increase investment in China at a time when geopolitical pressures are pushing for supply chain diversification.
- Energy exporters could benefit
Commodity exporters may receive some support if prices rise,but the playbook may be different this time. Whereas past recoveries driven by construction have buoyed the prices of industrial metals, benefiting exporters in the likes of Latin America and Africa, a recovery in services may be more supportive of energy. This could fire up global inflation again, putting real incomes back under pressure and leaving less room for central banks to lower interest rates in 2024. Some emerging markets would thrive in an environment of higher oil prices, but most face a period of sluggish growth as higher interest rates and subdued external demand bite.
China’s re-opening won’t benefit the global economy much
The upshot is that while abandoning ZCP has clearly improved the outlook for China this year, the rest of the world may not benefit much, if at all. Indeed, while we have also revised up our expectations for growth in the US and eurozone this year, the upgrades are due to domestic factors rather than a boost from China.