The official national accounts show that China’s economy rebounded more strongly than expected following the removal of the government’s zero-Covid policy. In seasonally-adjusted, quarter-on-quarter terms, output expanded by 2.2% in the first quarter.
While that was actually a bit less than the 2.5% increase that we had pencilled in, this was only due to revisions to the historical data. These revisions meant that the economy grew by 0.6% in the fourth quarter of last year versus the initial estimate of zero growth. The solid increase in output in the first three months of this year meant that the annual rate of GDP growth accelerated to a faster-than-expected 4.5%, from 2.9% in Q4.
We previously argued that China’s recovery was likely to be uneven and unlikely to save the world, with the rebound driven by services and some pick-up in housing activity while manufacturing lagged behind. That appears to have been borne out in the monthly activity data, which were published for March alongside the Q1 national accounts.
Those figures show that growth in retail sales surprised to the upside, accelerating to 10.6% year-on-year in March, from 3.5% across January and February. By contrast, growth of 5.1% year-to-date in fixed asset investment fell short of expectations as some rebound in housing was offset by softer infrastructure and manufacturing activity expenditure while industrial production growth of 3.9% underperformed.
Looking ahead, we expect the solid start to the year to be sustained for a while longer. Leading indicators have long been pointing to a cyclical recovery in China’s economy into Q3, which should be boosted by some further release of pent-up demand as unemployment falls and confidence recovers. This, coupled with powerful base effects stemming from lockdowns in 2022, mean that China is likely to register some very strong growth figures in the second quarter.
Our forecast for the economy to grow by 6.2% this year is already at the very top of the consensus and, if anything, the risks to our relatively optimistic view are probably to the upside. However, as things stand, our base case remains that the “sugar high” will not last forever with the recovery losing steam into 2024.