OECD Ups China’s 2023 GDP Forecast But Risks Persist

Screenshot of cover page of OECD Economic Outlook, March 2023

THE OECD HAS raised its forecast for China’s GDP growth this year to 5.3%, seven-tenths of a percentage point higher than its forecast last November.

However, its latest Economic Outlook sees growth slowing next year to 4.9% as the surge in economic activity from abandoning the zero-Covid policy moderates.

China’s lag in easing its anti-COVID restrictions compared to other countries is why it will have faster growth in 2023 than in 2022 when the overwhelming majority of G20 economies will experience the reverse as they got their re-opening boosts last year.

Signs of the impact of full reopening in China were seen in January and February’s purchasing managers’ surveys, with substantially more firms reporting rising output than falling output. Retail sales for the two months rose by 3.5% year-on-year.

The OECD expects household savings built up during the zero-Covid-policy period to be spent in 2023, especially on in-person services, boosting aggregate domestic demand. With inflation relatively subdued, policymakers also have the scope to keep monetary policy loose to help support consumption.

At the same time, the OECD expects stronger commodity demand from China, which accounts for a large share of consumption in many markets, to put upward pressure on commodity prices, especially if Chinese energy demand strengthens significantly after stagnating in 2022.

However, a resumption of international travel by Chinese residents will further boost global air traffic and services trade, with the strongest gains likely in neighbouring Asian economies based on visitor patterns before the pandemic.

OECD charts showing vistor arrivals from China by country in 2019 and China's share of global commodity demand in 2021

The official growth forecast for this year is 5%. Downside risks are still significant — US-China tensions are high and concerns about global financial vulnerabilities are rising.

The real estate slump still casts a long shadow over the economy. Property investment is stabilising but not turning around, falling by 5.7% year-on-year in January-February, although that represents an improvement on December’s 12.2% decline. 

Youth unemployment, which rose to 18.1% in January-February from 16.7% in December, is another persisting concern.

State-led investment grew by 10.5% year-on-year in January-February, far outpacing private investment growth of 0.8% year-on-year. New premier Li Qiang’s words of support for the private sector during the Two Sessions reflect the need for authorities to encourage the country’s discouraged entrepreneurs.

Otherwise expansionary policy-fuelled growth in the short term will fizzle out in the medium term.


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