China - The reopening rebound firms, led by consumption/services
China’s reopening rebound, led by consumption/services, has firmed. Real GDP growth accelerated in Q1, while activity data for March on balance point to strengthening momentum, with the housing market stabilising further. The main risks to the Chinese economy are the downturn in global demand, and ongoing tensions with the US on tech and Taiwan.
We raise our 2023 growth forecast to 6.0% (from 5.2%) and lower our 2024 growth forecast to 5.0% (from 5.2%)
As expected given the reopening rebound, real GDP growth accelerated sharply in Q1-23. Seasonally adjusted qoq growth rose to 2.2% qoq (Q4-22: 0,6% - revised from 0.0%), with annual growth rising to 4.5% yoy (Q4-22: 2.9%). After the Zero-Covid exit related payback, we expect qoq growth to moderate in the course of 2023. Still, annual growth will surge in Q2, reflecting the base effect from Q2-22 – when China was faced with broad lockdowns following Omicron-flare ups. Based on the Q1 GDP data (also taking into account the upward revision for Q4-22 and related spill-overs), we raise our 2023 growth forecast to 6.0% (from 5.2%). Partly reflecting the stronger 2023 base, our 2024 growth forecast is now 5.0% (was 5.2%).
March data confirm the rebound is being led by consumption and services; property sector recovery continues
The March data were a bit of a mixed bag, but pointed to stronger growth momentum led by services/consumption. After surging services PMIs, retail sales jumped to 10.6% yoy, the highest pace since June 2021. Residential property sales accelerated to 7.1% yoy in Jan-March, showing that real estate is recovering, with consumer confidence gradually improving and mortgage loan demand rebounding (see also Box 3 in Global View). Still, property investment remains lacklustre, while broader investment growth came in weaker than expected. On the industry side, the manufacturing PMIs lost some ground, while industrial production accelerated to 3.9% yoy (from 2.4% in Jan/Feb), but less than expected. The jobless rate fell by 0.3 pp to to 5.3%, but youth unemployment rebounded to 19.6%. Foreign trade (exports in particular) and lending came in stronger than expected. Bloomberg’s monthly GDP estimate for March rose to a 6-month high of 5.9% yoy (February: 4.4%).
Still-low inflation provides room for policy support, but we think Beijing will take a cautious approach
Despite the reopening rebound, inflationary pressures remain subdued so far. Headline (CPI) inflation dropped to a two-year low of 0.7% yoy in March, driven down by food and fuel prices. Core inflation edged up marginally, to 0.7% yoy, but is still very low. Producer price inflation fell even deeper in negative territory, to -2.5% yoy. Going forward, we expect inflationary pressures to pick up, although we cut our 2023 CPI forecast to 2.0%, from 2.5%. Although from an inflation perspective there is still room for further stimulus, we think Beijing will take a cautious approach. We expect policy makers to refrain from aggressive easing, while keeping any support peacemeal and targeted, as they want to contain overall leverage and prevent the overheating issues that arose after the rebound from the initial Covid-19 shock in 2020. We think Beijing will assume that the natural rebound from Zero-Covid exit will ‘do the job’, while other previous easing measures are still filtering through.