UNLIKE ON THE other side of the Taiwan Strait, Taiwan’s GDP shrank 0.9% year-on-year in the fourth quarter of last year, taking 2022’s full-year growth to 2.4%, a marked deceleration from 2021’s 6.5%
The fourth quarter was the first year-on-year quarterly contraction since the first quarter of 2016 and the largest since the global financial crisis in 2009.
Inflation, interest rate hikes and the dip in tech demand in Taiwan’s Western markets are suppressing demand for exports from the trade-dependent island. At the same time, Beijing’s zero-Covid policies, only abandoned during the fourth quarter, continued to disrupt business operations and suppress consumer demand on the mainland, which takes a quarter of Taiwan’s goods exports.
The 8.6% fall in total exports knocked 2.6 percentage points off GDP growth, muting the stimulative effect of a 3.1% increase in public spending in the fourth quarter.
The revival of China’s economy in 2023 should give Taiwan a strong boost, especially in the second half of the year, assuming the mainland’s Covid waves pass without significant economic mishaps and stimulus measures kick in.
The economy should return to growth in the first quarter, although the risks are to the downside.
There is still roughly a year before Taiwan’s next presidential and legislative elections, so that should be ample time for the economy to recover.
With Taiwan’s ruling party picking a self-described ‘political worker for Taiwanese independence’, William Lai, as its next chairman, thus putting him in line to be its candidate to succeed the term-limited President Tsai Ing-wen, the economy is unlikely to be the primary election issue.
That was slightly better than the consensus forecast of private economists — no doubt every drop of output that could be found in the fourth quarter was found, perhaps more — but far short of the official goal of 5.5% growth for the year.
Except for the first year of the pandemic, one has to go back to 1976 — the year Mao died — to find a year in which the economy grew more slowly.
It was not only the pandemic that held back the economy. The property market remained deeply troubled, and the war in Ukraine roiled the global economy, pushing up commodity import prices for China and weakening demand for its exports.
Covid-19 will likely continue to weigh on the economy in 2023, even as the unexpectedly sudden dropping of the zero-Covid policy allows it to reopen because of the risk of new surges of infection among a still under-vaccinated population.
Last week, Kristalina Georgieva, managing director of the International Monetary Fund, urged Beijing to continue reopening its economy, suggesting that if it does, China will return to contributing to global growth by around the middle of the year.
In October, the Fund forecasted that China’s economy would grow by 3.2% in 2022 and 4.4% this year. Earlier this month, the World Bank forecast 4.3% GDP growth for this year as the lifting of pandemic restrictions released pent-up consumer spending. (Its estimate for 2022, at 2.7%, undershot slightly.
December’s better-than-expected retail sales figures, also newly released, support for the World Bank’s view. Though still lower than a year earlier, they were down by only 1.8%, compared to November’s year-on-year drop of 5.9%.
Getting private investment going again will also be critical to this year’s outcome, one reason that senior leaders have been talking up the importance and prospects of private businesses in recent days and signalling that the tech crackdown is over for now.
Private investment grew by just 0.9% in 2022, compared with 8.7% and 4.7% in the two years before the pandemic started; state investment grew by 10.1% last year, compared to 1.9% and 6.8% in 2018 and 2019.
The level of social financing, a proxy for total debt, rose to 286% of GDP at year’s end, a reminder of the constraints on public spending to stimulate the economy, and that there is still plenty of work on deleveraging to be done.
Beijing will also have to deal with the economic impacts of its ageing and now contracting population. China’s population started shrinking in 2022 for the first time in six decades, the National Statistics Bureau reported today.
The decline in the fertility rate that has been evident since 2016 was the main reason, but the mortality rate also increased. The lifting of zero-Covid will likely bring more pandemic-related deaths in 2023.
The National Statistics Bureau data show that 62% of the population was of working age (16-59 years old), down from around 70% a decade ago, underlining the country’s economic challenges from its demographic shift. China could well lose its race to get rich before it gets old.
IN A DOWNBEAT outlook for the global economy, the World Bank had again cut its growth forecasts for China, but still sees a ‘bounce-back’ recovery this year.
The Bank estimates in its latest Global Economic Prospects that China’s economy expanded by 2.7% last year, 1.9% less than it had forecast in June.
Its forecast for this year is an acceleration to 4.3% GDP growth as the lifting of pandemic restrictions releases pent-up consumer spending.
That number is 0.9% less than the Bank’s June prediction, attributed to longer-than-expected pandemic-related disruptions, weaker external demand and protracted weakness in the real estate sector.
The recent shift toward reopening has been faster than expected, and there is significant uncertainty about the trajectory of the pandemic and how households, businesses, and policymakers in China will respond. The economic recovery may be delayed if reopening results in major outbreaks that overburden the health sector and sap confidence.
In 2024, the Bank expects further recovery to 5.0% growth, 0.1% shy of its previous forecast.
However, the Bank warns, China’s economy remains vulnerable to prolonged drag from the real estate sector, continued pandemic-related disruptions, and extreme weather events.
A slowdown in China would add further risks to already fragile global activity, with the impact being felt in global trade and commodity and financial markets. The direct trade spillovers would be most significant for China’s regional neighbours, especially those integrated into China’s supply chains, but trade-reliant developed economies would also feel the headwinds.
THE FIRST ANNUAL Central Economic Work Conference since October’s Part Congress and the zero-Covid policy was rolled back following street protests earlier this month was held in Beijing at the end of last week.
It also followed the publication of the high-frequency economic data for November that underlined how weak economic activity had become, from retail sales to exports. Both the manufacturing and non-manufacturing purchasing managers’ index were in contractionary territory.
The data, as much as the protests of frustration against strict lockdowns, may have driven the first steps in relaxing zero-Covid to alleviate the economic impact that it was having.
The OECD forecasts GDP growth of 3.3% this year, although some private economists believe the figure will fall below 3.0%. Waves of infections following the easing of zero-Covid are likely to mean the economy will start 2023 on the back foot.
However, the announcement following the work conference confirms that the leadership’s priority has switched from disease elimination to economic revival.
Relatively low inflation provides headroom for further monetary loosening. However, the meeting indicated that policymakers are more likely to turn to fiscal stimulus, with the twin objectives of stimulating domestic consumption and avoiding another round of property sector-related debt.
IT HAS BEEN an eventful and direction-changing ten days in China, starting with the widespread protests last weekend against the zero-Covid policy, the most significant expression of public dissent since the events in Tiananmen Square in 1989.
Then came the announcement of the death of former Premier Jiang Zemin. There was a certain symbolic symmetry to be spotted by those looking for such things as it was Jiang who took over as China’s leader in the aftermath of the suppression of the Tiananmen protest and then oversaw two decades of double-didgit economic growth and opening to the outside world.
However, the death allowed for the reassertion of solemnity and control.
As the week ended, Vice-Premier Sun Chunlan, the Politburo member responsible for implementing President Xi Jinping’s signature zero-Covid policy, gave hints of further relaxations of the approach to come. These will be partly in response to the street protests and partially because the draconian restrictions of zero-Covid have failed to contain the virus’s spread this year while the economic costs are mounting.
Changes will be framed as improvement of current policies or adaptation to new circumstances; state media has already started to soften the official line on the deadliness of the threat of the virus. Officials lifted lockdowns in dozens of districts in big cities like Shanghai and Guangzhou in the second half of the week.
This is not the end of zero-Covid, at least not yet. That will require mass vaccination of the elderly (now being prioritised), higher booster vaccination rates among the broader population and a greater capacity within the hospital system to treat severe cases, which will take months at least.
Lifting restrictions too early would result in deaths running, it has been estimated, into the hundreds of thousands. That would be politically unacceptable, especially given that the narrative over the past three years about China’s approach has saved lives compared with the recklessness of the West in accepting ‘living with Covid’.
Yet Beijing is now contemplating doing the same for one of the same reasons as the West, the economic cost of shutting down daily and business life.
Combined with the global headwinds buffeting the economy, which are likely to stiffen as the world economy heads towards recession, a still deeply troubled real estate sector and continuing tensions with the United States, this will keep China’s GDP growth below potential for the foreseeable future.
The OECD is forecasting 3.3% growth this year, and 4.6% next, which may be optimistic, although the indications from Beijing are that there will be more attention paid to growth from now on, so more fiscal and monetary support is likely.
The forthcoming Politburo meeting is expected to confirm that, although details will likely not be known until the subsequent Central Economic Work Conference mid-month.
THE OECD SEES China’s economy growing by 3.3% this year, a slight uptick from its 3.2% forecast in September. However, it has trimmed its forecast for 2023 to 4.6% from 4.7% in the face of a global economy expected to slow to 2.2% growth next year from 3.1% this.
Globally, tighter monetary policy, higher real interest rates, persistently high energy prices, weak real household income growth and declining confidence are all expected to sap growth, the OECD says in its latest Economic Outlook.
Those headwinds are buffeting China, but the OECD underlines how, additionally, the persistance of the omicron variant has caused recurring waves of lockdowns in 2022, disrupting economic activity.
Growth is being held up by infrastructure investment and efforts to bail out the property sector, including more stringent implementation of credit quotas for presold housing and a lower lending rate for first homebuyers.
Monetary policy has generally become more supportive with a series of interest rate and reserve requirement rate cuts.
Against that, a rise in precautionary household savings, spurred by low consumer confidence coupled with inadequate social protection, is holding back a rebalancing of demand towards consumption.
However, despite recent fresh food price rises, the OECD expects headline consumer price inflation to remain benign due to measures to manage energy and food prices:
Replacing part of China’s crude oil imports with discounted Urals oil from Russia is helping to contain inflationary pressure, and LNG reserves are being refilled from Russian sources.
China’s large grain reserves and export restrictions in the form of quotas will continue to mitigate the impact of rising global grain prices on domestic inflation and reduce the risk of shortages.
Lockdown-induced supply-side constraints on fresh food are the more significant inflationary concern.
The OECD also expects fiscal policy to become more supportive through cuts and deferrals of taxes and charges and spending of reserve funds. It says that a wide range of additional policies is being implemented, including ones outside the public budget. Overall, the measures are worth 1-2% of GDP.
Export growth will also likely stay low amid weaker global growth before picking up in 2024.
Over that time horizon, the OECD expects GDP growth to gradually move back to its underlying pace, which is slowing. It is forecasting 4.1% growth in 2024. Meanwhile, infrastructure investment will pick up, partly offsetting weaker real estate investment.
However, the OECD warns:
Continued defaults and disorderly deleveraging in the overstretched property sector may trigger failures of smaller banks and shadow banking institutions. By contrast, relaxing prudential measures and encouraging investment in real estate may fuel the bubble and cause more significant disruptions further down the road.
A further rise in corporate defaults will improve risk pricing but may adversely affect banks, trust companies, and other private and institutional investors.
The key downside risk remains Covid-19. Vaccination rates have picked up, but they remain low among the elderly, especially those over 80. Booster jabs also seem to have plateaued. Further, the effectiveness of Chinese vaccines is less than that of Western ones.
That makes lifting the zero-Covid policy nigh impossible in the near term, regardless of its economic cost. The recent outbreaks have foiled attempts to administer it more flexibly.
Like the IMF, the OECD calls for structural reforms to strengthen the social safety net, which would help to reduce precautionary savings and rebalance demand from investment to consumption. It suggests that pension and unemployment insurance coverage should be extended to all and health insurance coverage widened.
It also suggests a series of reforms that would strengthen the private sector and lessen the dominance of state-owned enterprises, although that is not the tenor of the new era.
CHINA’S ECONOMY GREW by 3.9% year on year in the third quarter, a rebound from virtually flat growth in the second quarter.
The announcement of the GDP data had been delayed by the National Bureau of Statistics for unexplained reasons from their scheduled release ahead of the 20th Party Congress.
Other high-frequency data released on October 24 shows the rebound weakening in September going into the fourth quarter.
Domestic consumption is still being suppressed by zero-Covid lockdowns, unemployment is edging up and the property sector contracted for the fifth consecutive month. Exports are also slowing as the global economy runs into the headwinds of inflation and recession fears.
Even with another quarter of 3.9% growth, the economy would only expand by 3.2% for the full year. That would meet the IMF’s latest downwardly revised GDP forecast but be well below the now little-mentioned official target of 5.5%.
Markets tumbled on the data, the presentation of the new Politburo Standing Committee, which comprises Xi Jinping loyalists, and a reading of the Party Congress as indicating national security would take primacy over economic development in Xi’s third term. Nor was there any indication of imminent easing of the zero-Covid policy or of more aid for the ailing property sector.
As the UK government found out recently, markets can be punishing of governments, even those who do not have much time for them.
The International Monetary Fund has again cut its growth forecasts for China. Its newly published World Economic Outlook expects the economy to grow by 3.2% this year and 4.4% in 2023.
These are cuts of one-tenth and two-tenths of a percentage point, respectively, from the forecasts it made in July and 1.2 percentage points and seven-tenths of a percentage point from April’s forecasts.
GDP growth of 3.2% would be the lowest in more than four decades, excluding the initial Covid-19 crisis in 2020. China’s economy grew by 8.1% in 2021 as it recovered from that.
These latest revisions should be seen in the context of a global economy forecast to grow at 3.2% this year, unchanged from July’s forecast, but slowing to 2.7% in 2023, two-tenths of a percentage point less than forecast in July, and down from 6.0 growth in 2021.
The Fund points to two main drags on China’s growth:
continuing weakness in the property sector, where it warns that further deterioration could spill over to the domestic banking sector, which would have adverse effects outside the country; and
the anti-Covid lockdowns, which have imposed sizable constraints domestically and gummed up already strained global supply chains.
The Fund says that pandemic-related forces have been significant in China, with its second-quarter contraction contributing to slower global activity.
Temporary lockdowns in Shanghai and elsewhere due to COVID-19 outbreaks have weakened local demand, which is reflected in the new-orders component of the purchasing managers’ index. Other data corroborate this picture of slowing economic activity in China. Manufacturing capacity utilization in the country, for example, slowed to less than 76 percent in the second quarter: its lowest level in five years, except during the acute phase of the pandemic.
Such disruptions not only slow the domestic economy but are felt more broadly. Lower demand in China implies fewer exports for foreign suppliers. At the same time, capacity constraints in production and logistics delay the unclogging of supply chains, keeping global supply pressures—and hence inflation—elevated.
Pedalling as softly as it can, the Fund calls on Beijing ‘to pave the way’ for a safe exit from the zero-Covid strategy, including by adding to the country’s successful vaccination campaign, especially for the undervaccinated elderly.
The Fund recites a litany of downside risks to the global economy, from a Covid resurgence to monetary policy divergence. In that last regard, China is already an outlier, with the People’s Bank of China cutting interest rates when other central banks are raising them.
However, the signs of a significant slowdown in the real estate sector, historically an engine of growth for China’s economy, exercise the IMF, which says that the sector’s downside risks dominate the outlook for China’s growth recovery.
The decline in real estate sales prevents developers from accessing a much-needed source of liquidity to finish ongoing projects, putting pressure on their cash flows and raising the possibility of further debt defaults. Concerned with the delay in the delivery of residential units, thousands of buyers are calling for a moratorium on mortgage payments that would lead to forbearance and exacerbate the risk of nonperforming loans for banks, as well as the liquidity squeeze developers face. Uncertainty about the property sector could also have an impact on consumption and local government finances.
The Fund fears that further intensification of these negative feedback loops between housing sales and developer stress risks a larger and more protracted contraction.
This would be a large blow, given that the real estate sector makes up about one-fifth of GDP in China. Furthermore, the potential for banking sector losses may induce broader macro-financial spillovers that would weigh heavily on China’s medium-term growth.
THE OECD HAS cut its forecast for China’s GDP growth this year by 1.2 percentage points to 3.2%, citing repeated lockdowns under the zero-Covid policy and the crisis in the property market.
Its latest interim Economic Outlook, updating its June numbers, paints a grim picture of the worldwide shock stemming from Russia’s attack on Ukraine. The ensuing energy crunch and surge in food prices have inflicted a widespread cost-of-living crisis. The OECD is holding its global growth forecast unchanged at 3.0% but sees growth slowing next year by 0.6 of a percentage point to 2.2% as inflation becomes entrenched.
In contrast, the OECD sees a recovery in China next year to 4.7% growth on the back of policy stimulus and a rebound from this year’s Covid lockdowns. It does not see much, if any, further monetary easing, but it expects stimulus measures worth up to 2% of GDP to strengthen infrastructure investment. However, even 4.7% growth would still be 0.2 of a percentage point lower than the OECD’s previous forecast.
It also expects China’s headline inflation next year to be around 3%, a higher level than in the recent past. China has had relatively low and stable inflation by world standards, despite the upward pressures from food and energy.
The OECD’s recovery growth forecast for 2023 turns on Beijing dealing with the continuing real estate downturn amidst elevated corporate debt levels. It also warns that risks remain of sustained weaker private domestic demand, a veiled reference to the continuance of strict zero-Covid protocols.
As a measure of how the world has been changed by Russia’s invasion of Ukraine, it is worth remembering that a year ago, the OECD was expecting China’s economy to grow by 5.8% this year.
CHINA’S LATEST OFFICIAL manufacturing purchasing managers index (PMI) points to extremely muted third-quarter GDP growth.
That is not the economic background President Xi Jinping would have chosen to go into the Party Congress, which state media now say will start on October 16, and during which Xi is likely to be reappointed to an unprecedented third term as Party general secretary.
August’s manufacturing PMIs was 49.4, up a tad from 49.0 in July but still stuck in contraction territory (50 is the PMI’s divide between contraction and expansion). The sub-indicators of output and export orders continued to contract. The non-manufacturing PMI is still in expansionary territory but nevertheless eased to 52.6 from 53.8.
State media’s boosterism about the latest data showing recovery seems misplaced.
COVID-19 lockdowns and the extreme heat and drought continue to disrupt the domestic economy. At the same time, soft external demand, as Europe and the United States battle inflation and the threat of recession, adds to the headwinds buffeting China’s economy.