China’s GDP in the first quarter came in considerably stronger than expected, raising hopes for the global economy and equity markets. Yet significant headwinds still lie ahead for both China and global markets.
The economic rebound in the first quarter, at 4.5% y/y, was led by the domestic consumption and services sectors. Retail sales rose significantly in March, up 10.6% y/y. Services output in March advanced 9.2% y/y. Recall that services account for 53% of the Chinese economy. The Chinese returned to dining out. Restaurant sales soared, registering a 26.3% advance in March. This clearly was a reopening recovery of Covid-sensitive parts of the economy, which is likely to continue to propel the economy in the current quarter. Of course, eventually, pent-up demand will fade as a driving force.
Industrial production also advanced in China in March, with automobiles, telecom, and electrical machinery advancing. However, fixed investment and infrastructure investment slowed in the quarter. This slowing suggests that the investment climate in China remains constrained despite some indications that government regulators are seeking to be less restrictive. The government wishes to encourage growth but in a very measured way, targeting fiscal policy measures towards small and medium enterprises. At the same time, it is seeking to rein in the growth of local government financing vehicles. The People’s Bank of China states that it will continue to take a “prudent” monetary stance and does not see a current need to cut interest rates. Household credit demand has been strong, indicating some recovery in that sector as government measures target both the supply and demand sides of the housing market. The government is putting emphasis on securing the delivery of pre-sold homes, with the result that new-home completions have surged.
The nature of China’s recovery thus far does not imply strong growth in China’s imports from the rest of the world. Growth in domestic services has limited impact on the demand for imports. Growth in domestic consumption has stronger implications for imports but still far less than would be the case for a recovery led by fixed-asset investment growth including infrastructure investment. The IMF, in its just-released World Economic Outlook, projects China’s economic growth for 2023 at 5.2% and expects positive spillover for its trading partners, particularly those in the Asia-Pacific region. Indeed, that region is forecast to grow at a 4.6% rate this year and contribute more than 70% of global growth during the year.
The IMF notes that the main effect of China’s reopening on other countries will be increased demand for consumer goods. This contrasts with the increased demand for investment goods that characterized previous Chinese economic growth spurts. This is a reason why the advanced economies are projected by the IMF to experience “an especially pronounced growth slowdown” despite the strong rebound in China. Indeed, both Germany and the UK, two countries that would have benefited if China needed investment goods, are projected to experience negative growth this year. Headwinds for the advanced economies include Russia’s continued war in Ukraine, rising interest rates as central banks battle stubbornly high inflation, and strains in the banking system. As the year progresses, the advanced-country slowdown will become a negative factor affecting the pace of China’s recovery.
In view of these limitations on the expected boost for advanced economies coming from China’s reopening, it is understandable that the surprising strong first-quarter economic growth report had little effect on Chinese share prices. Shanghai stocks were up 1.29% in the five markets days ending April 19, while Shenzhen stocks were off 1.09%. Hong Kong’s Hang Seng Index was up 0.29% while Taiwan stocks were down 1.02%. The positive economic outlook for the Asia-Pacific region suggests equity markets in the region, including China’s, will outperform on average this year, but there will likely be considerable variation among markets.
William H. Witherell, Ph.D.
Vice Chairman & Chief Global Economist
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Sources: IMF.org, Oxford Economics, Goldman Sachs Economic Research, cnbc.com, chinalastnight.com, Financial Times
