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The official national accounts show that China’s economy rebounded more strongly than expected following the relaxation of the government’s zero-Covid policy. In seasonally-adjusted, quarter-on-quarter terms, output expanded by 2.2% in the first quarter of 2023. 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 2022 versus the initial estimate of zero growth. The solid increase in output in the first three months of 2023 meant that the annual rate of GDP growth accelerated to a faster-than-expected 4.5%, from 2.9% in Q4 2022.
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 2023 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 2023, from 3.5% across January and February in the same year. 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 2023 to be sustained for a while longer. Leading indicators have long been pointing to a cyclical recovery in China’s economy into Q3 2023, 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 of 2023.
Our forecast for the economy to grow by 6.2% in 2023 is at the very top of the consensus and, if anything, the risks to our relatively optimistic view are probably to the upside.
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