Tag Archives: GDP growth

OECD Sees Recovery Hope For China’s Economy In 2023

Table showing OECD GDP growth forecasts for 2022 and 2023 as updated in September 2022

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.

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More Signs Point To China’s Continuing Muted Economic Growth

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.

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Rate Cut Only Highlights Slowing Economic Growth In China

THE 10 BASIS points cut by the People’s Bank of China to its one-year lending rate for the first time since January to 2.75% was unexpected. 

It was a direct response to July’s economic data showing the economy slowing further.

Retail sales growth in July slowed to 2.7% year-on-year, down from 3.1% in June. Industrial output growth was little changed from June at 3.9% year-on-year. Fixed asset investment growth, at 5.7% year-on-year in January-July, was nearly half the pace of last year, and private sector investment grew by just 2.7% year-on-year in the same seven-month period.

The downturn in the beleaguered housing market is accelerating. Property investment fell by 12.3% year-on-year in July, the fastest pace this year. New home sales fell by 28.3% year-on-year. 

Most concerning for the leadership is that, while urban unemployment overall was steady in July at 5.4%, unemployment among 16-24-year-olds set another monthly record at 19.9%. 

The early indications from August are that the economy is not turning round. If anything, the downside risks are growing with the latest lockdowns to control new Covid-19 outbreaks and weaker export prospects as global markets slow.

Further monetary and fiscal stimulus to rev up domestic demand, including state money to revive property development projects, are likely as today’s cut in rates is too modest to have more than a marginal impact. 

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China’s Growth Looks Fragile Despite Strong Exports

CHINA’S EXPORTS CONTINUE to grow strongly, for now, but imports have almost flatlined in comparison, suggesting a refilling of supply chains after Covid-19 lockdowns but not a commensurate pick up in pent-up domestic demand.

According to the General Administration of Customs, goods exports rose 18% year-on-year in July, barely changing from the growth rate in May and June.

However, imports grew by 2.3% year-on-year in July, the fifth month of sub-4% growth.

Exports to ASEAN rose by 33.5% year-on-year, and to the EU, by 23.5%, more than offsetting a slowdown in exports to the United States, up by 11% year-on-year, having grown by closer to 20% in May and June.

Exports to Russia increased significantly, up 22.2% in the month, reversing a drop of 17% in June.

The headwinds in the global economy will likely slow the progress of China’s exporters in the second half. But with domestic demand’s recovery remaining sluggish and downside risks from the property market and Covid-19 lockdowns persisting, overall GDP growth will be fragile.

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IMF Cuts Its China Growth Forecasts Sharply

Screenshot of cover of IMF' July 2022 update to its World Economic Outlook

THE INTERNATIONAL MONETARY FUND has sharply cut its forecast for China’s growth this year and next as part of a gloomy mid-year update to its World Economic Outlook.

The Fund is now expecting China’s economy to grow 3.3% this year and 4.6% next, which is 1.1 percentage points and half a percentage point lower, respectively, from its April forecast.

The IMF cites the lockdowns to contain Covid-19 and the deepening real estate crisis, causing a sharper-than-expected slow down in the first half of the year, as the reasons it lowered its forecast. It warns that both could worsen, further reducing growth, while geopolitical fragmentation could impede global trade and cooperation.

The slowdown has already added to global supply chain disruptions.

COVID-19 outbreaks and mobility restrictions as part of the authorities’ zero-COVID strategy have disrupted economic activity widely and severely. Shanghai, a major global supply chain hub, entered a strict lockdown in April 2022, forcing citywide economic activity to halt for about eight weeks. In the second quarter, real GDP contracted significantly by 2.6 percent on a sequential basis, driven by lower consumption—the sharpest decline since the first quarter of 2020, at the onset of the pandemic, when it declined by 10.3 percent. Since then, more contagious variants have driven a worrisome surge in COVID-19 cases. The worsening crisis in China’s property sector is also dragging down sales and real estate investment. The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners.

Chart showing impact of Covid-19 outbreaks in China on global supply chains. Source: IMF July 2022 update to World Economic Outlook

Growth of 3.3% would be China’s slowest growth in four decades, excluding the initial COVID-19 crisis in 2020. The official target of above 5% growth seems increasingly out of reach regardless of the infrastructure spending stimulus being poured into the economy.

Higher energy and food prices because of the war in Ukraine are external headwinds beyond Beijing’s control, as is policy tightening by the major central banks to tame inflation. What is in Beijing’s remit, a recalibration of the zero Covid strategy to reduce growth trade-offs, will be minimal at most.

Downside risks include larger-scale outbreaks of more contagious virus variants that trigger further widespread lockdowns under the zero-COVID strategy. In addition, delayed price and balance sheet adjustments in the property sector could cause a sudden, wider crisis or a protracted adjustment with broader macro-financial spillovers. A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors. For example, further tightening of supply bottlenecks could cause higher consumer goods prices worldwide, but lower demand might ease commodity pressures and intermediate goods inflation.

Overall, the IMF expects slower growth and trade and higher inflation globally. It now puts global growth at 3.2% this year and 2.9% next, although it acknowledges that the risks are ‘overwhelmingly tilted’ to the downside. Its ‘plausible alternative scenario’, in which risks materialize and global growth slows to 2.6% this year and 2.0% in 2023, looks as plausible as its baseline scenario.

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Zero-Covid Weighs Heavily On China’s GDP Growth

CHINA’S ECONOMY JUST about eked out positive growth in the second quarter compared to a year earlier, but the contraction from the first quarter tells the story of the economic impact of the zero-Covid policy on businesses and consumers, especially the lengthy lockdown in Shanghai.

Gross domestic product grew by 0.4% in April-June year-on-year and contracted by 2.6% compared to January-March, the Bureau of National Statistics announced today.

Shanghai’s economy shrank 13.7% year-on-year in the second quarter and Beijing’s 2.9%.

The national year-on-year number was the smallest since the data series began in 1992, excluding the 6.9% contraction in the first quarter of 2020 due to the initial COVID shock.

The recent high-frequency indicators, particularly for retail sales, suggest that the economy is starting to bounce back.

However, outbreaks of the highly contagious Omicron variants forcing more full or partial lockdowns remain a downside risk to recovery, given the continuing commitment to the zero-Covid policy.

The beleaguered property development sector remains a drag on growth, and the worsening outlook for the global economy is a further headwind.

The official target of 5.5% growth for the full year continues to look beyond reach, with an unrealistic 10% growth needed in the second half to achieve it. Further stimulus measures are likely, although authorities are limited in what they can do that will not stoke inflation (subdued by world levels) or worsen long-term debt risks.

Bloomberg calculates that $1.1 trillion has been earmarked for infrastructure spending, suggesting at best an extended pause to the effort to deleverage the economy.

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China’s Modest Manufacturing Pick-Up Will Not Gain Momentum

THE CAIXIN SERVICES purchasing managers index (PMI) hit its highest level in nearly a year in June at 54.5, following the rebound in the manufacturing PMI to 51.7, its highest level since May 2021, after four months of decline.

A PMI reading above 50% indicates expansion; The Caixin index focuses on smaller and medium-sized firms, while the official PMI tracks larger, typically state-owned companies.

While the easing of lockdowns, including in Shanghai, will have boosted the services PMI, June’s uptick in the manufacturing reading stood in contrast to a slowing of manufacturing output in the United States, the United Kingdom, Japan, India, ASEAN and Brazil, and contraction in the euro-area and South Korea.

However, China’s manufacturers will not be immune to the adverse impacts of the conflict in Ukraine and tighter monetary policies to rein in inflation will erode global market conditions. China’s manufacturing output will slow in the coming months, even if less sharply than elsewhere.

Relatively weak growth will likely continue for the rest of the year in the face of strong external and internal headwinds. These range from worsening US-China tensions to President Xi Jinping’s doubling down on the zero-Covid-19 policy. These are buffeting domestic economic activity, which was already slowing, and global supply chains already under strain.

If China gets away with fewer lockdowns — and softer ones — it should see manufacturing, consumption and investment pick up. There will be continuing monetary and fiscal stimulus to bolster private spending and employment, both critical to the twin goals of growth and social stability.

The risk remains old-school investment spending, which could fuel financial instability, especially in the still beleaguered property sector. The government announced an extra $120 billion of lending for infrastructure by state policy banks at the start of June and a further $80 billion via bond issuance at the end of the month.

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World Bank Lowers China Growth Forecast

The World Bank's Global Economic Prospects, June 2022 update cover page

THE WORLD BANK has cut back its forecast for China’s economic growth this year by 0.8 of a percentage point to 4.3%.

The revision to its forecast in January comes in the latest update to its Global Economic Prospects report.

The Bank forecasts 5.2% growth next year and 5.1% in 2024. Its revision for 2023 is only a 0.1 of a percentage point reduction.

The World Bank is usually among the more optimistic forecasters of China’s GDP growth. A projection for this year so below the official target of 5.5% growth underlines the severity of the economic headwinds China faces; not that many expect the official target to be hit.

The Bank expects the global economy to slow to 2.9% growth this year and not rebound next.

Following more than two years of pandemic, spillovers from the Russian Federation’s invasion of Ukraine …. is leading to high commodity prices, adding to supply disruptions, increasing food insecurity and poverty, exacerbating inflation, contributing to tighter financial conditions, magnifying financial vulnerability, and heightening policy uncertainty… Moreover, the outlook is subject to various downside risks, including intensifying geopolitical tensions, growing stagflationary headwinds, rising financial instability, continuing supply strains, and worsening food insecurity.

On China, the Bank says that strict lockdowns to control Covid-19 outbreaks have been the main reason for slowing growth. Consumer spending has been particularly subdued, and trade and manufacturing investment have lost momentum, exacerbated by supply disruptions and the negative impact of the war in Ukraine.

The pandemic has also reversed the recovery of the real estate investment seen at the start of the year.

In response, authorities have already relaxed some property and financial regulations and eased fiscal and monetary policy. However, the Bank expects more stimulus measures to mitigate the impact of the lingering pandemic and worsening terms of trade.

The Bank is uncertain about the size, composition and effectiveness of policy stimulus, noting that increased investment in the stock of public infrastructure — the tried and trusted measure authorities are most likely to turn to — faces diminishing returns.

The outlook is subject to significant risks.

Repeated COVID-19 outbreaks and strict lockdowns across major cities would curtail the recovery of consumption and services activity, disrupt supply chains, and weigh on investor confidence. In addition, renewed stress in the housing sector would further reduce real estate investment and government revenues, affect the solvency of developers and local government financing vehicles, and weigh on house prices and consumer spending.

It is Covid-19 that hangs heaviest over the outlook. The Bank estimates that a resurgence could reduce China’s growth by a further 0.5 of a percentage point in 2022 and 0.3 of a percentage point in 2023.

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April’s Trade Figures Stiffen The Headwinds China’s Economy Faces

Longtan Container Terminal of Nanjing Port seen on May 6, 2022. Photo credit: Xinhua/Li Bo

THE TRADE REPORT for April brings further evidence of the headwinds facing the economy.

China’s General Administration of Customs reported today that goods exports grew by 3.9% year-on-year in April in dollar terms, the slowest pace since June 2020, while imports showed no growth year-on-year.

Since importers are paying significantly higher prices for commodities, this implies substantially lower import volumes than last year.

Lockdowns in big cities have severely disrupted global supply chains. At the same time, global demand for goods, especially electronics, is starting to weaken in the face of inflation squeezing consumers’ disposable incomes, and services recovering the share of spending lost to good goods during the pandemic.

The purchasing managers’ index for April showed that manufacturers’ employment intentions declined. That was also true in services, but it was the eighth drop in nine months for manufacturing. Premier Li Keqiang has promised to intensify efforts to stabilise the job market and expressed concern about the ‘grave’ outlook. The dotted line between unemployment and social instability always looks to top leadership to be short and threatening.

As Li indicates, monetary and fiscal policy is being selectively loosened, and there is likely more to come. Yet the latest trade figures add weight to arguments that the economy may grow little in the second quarter and might even contract.

The bind authorities find themselves in is that meeting the target of 5.5% GDP growth this year depends on the lockdowns easing substantially by the middle of the year. Under- and ineffective vaccination and the political dynamics of doubling down on the zero-Covid policy make that an impossibly tight deadline.

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World Bank Cuts China Forecast As Uneven Recovery Gets Rougher

THE WORLD BANK has trimmed its GDP growth forecast for China this year to 5.0%, 0.4 of a percentage point lower than its previous forecast made in October last year. The Bank says that growth could slow to 4.0% on a worst-case basis.

The new numbers are contained in the Bank’s latest update to its economic forecasts published ahead of its joint Spring meeting with the International Monetary Fund.

The reasons for the growth downgrade are familiar: a spike in Covid-19 infections causing strict lockdowns and disruption of supply chains, continuing strains on overleveraged property developers, the Russian invasion of Ukraine raising commodity prices, and tightening US monetary policy.

The Bank also highlights China’s structural slowdown and regulatory regime change.

It has this to say about China’s approach to containing Covid-19:

Eliminating CoViD-19 infections through a combination of testing-tracing-isolation and targeted shutdowns entailed a relatively small economic cost when the COVID-19 variants were less infectious. However, the highly transmissible but seeming less potent Omicron variant has increased the economic costs and reduced the health benefits of an elimination strategy. Both services and manufacturing PMis dropped in January reflecting CoViD-19 flare-ups and strict control under Beijing’s zero CoViD strategy.

Despite the changing tradeoffs, China is maintaining the strict strategy, perhaps because (a) tolerating low levels of infection may not be a stable equilibrium, (b) a spike in infections could overwhelm China’s limited health capacity in rural areas, and (c) the omicron variant may still have serious health consequences for China’s population because it has suffered fewer prior infections and been inoculated with a less effective vaccine.

The Bank estimates that the impact of pursuing zero-COVID will likely be to reduce 2022’s output by about 0.6%.

A longer-term Covid-related question raised by the Bank is whether the interruption caused by the pandemic to the trend decline in China’s share in the final-goods imports of the United States and the rising sourcing of intermediate goods from China by regional countries is temporary or not.

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