China’s economic growth profile in 2023 will be characterised by a weaker first six months and a stronger second half. As in other Asian economies that lifted zero-covid policies, re‑opening will not result in an immediate acceleration of growth, as a surging viral caseload causes disruption to supply chains and consumption. However, after a difficult first quarter, China’s economic momentum will probably build in the second quarter, before a strong recovery sets in during the second half of the year, when the public health situation will be manageable. We also expect global demand for Chinese exports to recover in the second half of 2023. The lagged effect of pro‑growth policies (to be announced) will underpin stronger economic performance in 2024.
China’s growth pattern over the next two years will differ in important ways from the post-pandemic recovery in other major economies. In the US, for example, strong and prolonged private consumption—stemming from stimulus-backed savings—supported growth. China will also experience an initial rebound in consumption, driven by pent-up demand, but the recovery will be relatively mild, owing to the negative impact of zero-covid on personal incomes and the absence of household-focused stimulus. Similar to consumption, private investment will also take time to rebound. To lift sentiment, we expect the government to announce expansionary fiscal measures—supported mostly by bond insurance and a wider fiscal deficit—and to front-load its spending in 2023, stimulating the economy and financing treatment for covid‑19.
The first sectors to benefit from China’s exit from zero-covid will be healthcare and pharmaceuticals, followed by offline consumption such as catering, transport and tourism. We expect increased spending by both the government and households, in preparation for the near-term and repeat waves of coronavirus cases. The property sector will also benefit from supportive policies and improving income expectations.
- After an uneven growth performance this year, China’s economy is projected to recover in 2023. Activity in China has followed the ups and downs of the pandemic—outbreaks and economic slowdowns have been followed by uneven recoveries. Despite policy support, real GDP growth is expected to slow to 2.7 percent in 2022, before recovering to between 4.3-5.2 percent in 2023 (World bank and Economist Intelligence Unit estimates) amid a reopening of the economy.
- The growth outlook is subject to significant risks. Recurrent COVID-19 outbreaks, the possibility of renewed mobility restrictions and precautionary behavior to slow the spread of the virus could lead to longer-than-expected disruption in economic activity. Continued adaptation of China’s COVID-19 policy will be crucial, both to mitigate public health risks and to minimize further economic disruption. Persistent stress in the real estate sector could also have wider macroeconomic and financial spillovers. China’s economy is also vulnerable to climate change, highly uncertain world growth prospects, greater-than-expected tightening in global financial conditions and heightened geopolitical tensions.
- The continued adaptation of China’s public health policies will be crucial to mitigate public health risks and also minimize further economic disruption. Accelerated efforts on public health preparedness now could enable a safer and less disruptive re-opening. Public health measures could include focused efforts to increase vaccination rates among vulnerable groups, rollout of a booster campaign, increased access to effective COVID-19 treatments, and efficient use of limited hospital capacity for severe cases.
- Continued macroeconomic policy support will be needed in the near term, as the economy remains below potential and the global environment is weakening. China has adequate fiscal policy space, especially at the central level, that could be deployed to bolster a stronger recovery. Directing these fiscal efforts toward social spending and green investment rather than traditional infrastructure would not only support short-term demand but also contribute to more inclusive and sustainable growth in the medium-term.
- Deeper structural reforms, put on hold by the pandemic, will have to be restarted to successfully achieve more balanced, inclusive, and sustainable growth. Reform priorities include creating a level playing field for the private sector by ensuring a predictable regulatory environment and addressing distortions in the access to credit. Such measures could be complemented with reforms to strengthen social security and reduce inequalities in access to quality healthcare and education. At the same time stronger efforts are needed to accelerate the transition to a low carbon economy through more market-based instruments and investment in climate-smart infrastructure.
- Increasing youth unemployment rates have highlighted the emergence of another pressing challenge for policymakers. Employment subsidies and public works programs have provided near-term support to youth employment. The special topic of this report argues that these short-term measures could be complemented with structural measures to strengthen the skillset of the youth, improve labor market mobility, address information asymmetries, and strengthen labor market statistics.
Source: World Bank & Economist Intelligence Unit