China - Goodbye Zero-Covid, Welcome Recovery
Rapid Zero-Covid exit means China's rebound will start earlier and will be a bit more pronounced. Following a turbulent exit, we expect a staged recovery in domestic demand and economic growth. We raise our 2023 growth forecast to 5.2%, from 4.8%, with downside and upside risks remaining.
In our published in early December, we noted that headwinds should partly fade this year thanks to the Zero-Covid exit and more property sector support. With the rapid turn in Covid-19 policy since, and other signs that supporting economic growth has moved up Beijing’s priority list, we assume that the phased rebound of domestic demand – following a messy exit in late 2022 and early 2023 due to public health issues – will start earlier and will be a bit more pronounced, with above-trend quarterly growth in Q2 and Q3. As a result, we have raised our annual growth forecast for 2023 to 5.2%, from 4.8%. That said, the road to recovery could well prove bumpy, with several headwinds (such as slowing external demand and tensions with the US/west on tech/Taiwan), and downside but also upside risks remaining.
Following the turbulence stemming from the abrupt Zero-Covid exit and related public health issues …
Following unprecedented protests in November, the government made a U-turn in Covid-19 policy (both at the central and local levels), from the unique strict Zero-Covid stance to a laissez-faire policy. This implies a clear decrease in the overall lockdown intensity, going hand in hand with a surge in infections and casualties. Official numbers do not give a realiable picture of the real damage to public health, but reports of overburdened hospitals and crematoria speak for themselves. Although we have already seen an improvement in some mobility data in early 2023 (particularly car traffic, as travellers are still a bit cautious regarding public transport), the U-turn in Covid-19 policy does not mean an immediate sharp turnaround in momentum on all fronts. This is also illustrated by recent data. December activity data pointed to a further slowdown, although retail sales were surprisingly strong, driven by car sales (with a tax breaking expiring end-2022) and medicine. After the Q3 22 rebound from the broad lockdown slump in the spring, real GDP slowed again in Q4, although coming in better (at 0.0% qoq and 2.9% yoy) than expected. Covid-19 cases could surge again in and just after the Lunar New Year holiday period end-January, when many Chinese visit their home towns. This could create renewed disturbances to both the supply and demand side, although so far production chains seem to have held up quite well despite the messy Zero-Covid-exit.
… we expect a staged recovery in domestic demand, and GDP growth to gain momentum
Not all headwinds will suddenly disappear due to the U-turn in Covid policy, with export strength fading on weaker global demand, the property sector not out of the woods yet and credit growth on a weak footing. Still, we think the rapid exit from Zero-Covid takes away one of the most prominent drags, also given the effects it had on consumer confidence and the property slump. Coupled with the stepping up of targeted support, and with more signs of progress made with resuming stalled construction projects, we anticipate the property sector to bottom out, although restoring confidence remains key and will take time. We assume these policy shifts will also help turning the credit cycle, as weak mortgage demand has been key in explaining recent weakness in credit growth. All in all, we expect the drawdown of excess savings and improving consumer confidence to help spur a phased pick-up of consumption, with above-trend qoq growth of real GDP in Q2/Q3.