- The world’s No. 2 economy is off to a strong start, but the growth picture in 2024 and beyond is less rosy.
According to Bloomberg article published on April 27, 2023, China’s economy looks to be on pace to return to its pre-pandemic growth trend by the end of 2023. The National Bureau of Statistics published data on April 18 showing that gross domestic product expanded 4.5% in the first quarter, fueled in large part by a spree of revenge spending by shoppers, travelers, diners and moviegoers. Households allocated more of their income to consumption and less to savings, a sign that consumers had recovered their nerve following Beijing’s decision late last year to abandon Covid-19 controls, triggering a massive wave of infections.
Several investment banks and money managers promptly upgraded their 2023 growth forecasts to well above the government’s official target of about 5%. Patrick Zwiefel, chief economist at Pictet Asset Management, is among the most optimistic. He’s penciled in a 6.6% expansion for the full year, powered by an 11% jump in consumer spending.
China bulls can marshal an assortment of data to make their case. There’s the property market, which appears to be emerging from a prolonged slump. Sales of apartments rose in the first quarter—the first increase in 18 months—bolstered by government-mandated cuts to mortgage rates. And bank lending to companies has been breaking records, an indication that officials have stuck to their tried-and-tested playbook for boosting growth: credit-fueled investment.
But not all the statistics coming out of China are that upbeat. Household income growth appears too weak to power a double-digit rise in consumer spending. Inflation-adjusted urban wages in the first quarter were up just 2.5% from a year earlier, according to official sources; a survey of small and midsize companies carried out by brokerage CLSA Ltd. has them rising less than 1% over the period.
Many companies are unsure about their prospects and therefore reluctant to hire more workers. China’s official unemployment rate dipped slightly this year, to 5.3%, but other data tell a different story. First-quarter listings on one of the country’s most popular job websites, Boss Zhipin, were down 5% from the previous year, according to research group TH Data Capital, with the information technology sector showing the largest decline. Youth unemployment is hovering near a record high of 20%.
The job market might take until 2024 to recover fully, says Yi Xiong, Deutsche Bank AG’s chief China economist.
The rebound in the property market is also looking shaky. Sales in major cities slowed in April from the previous month, according to China Real Estate Information Corp. The government has instructed banks to step up lending to developers to make sure they complete existing projects, but builders are starting fewer ones. As a result, total property construction was down about 10% in the first quarter from a year earlier.
Although the market may eventually stabilize, Zhu Ning, a professor at the Shanghai Advanced Institute of Finance, rules out a return to the go-go days. Chinese households’ view of housing as a safe store of wealth has been fundamentally altered—a victim of the government’s crackdown on real estate speculation and developers’ failure to deliver projects on time. “There is not a lot of hope in the sector for the next few years on a national level,” Zhu says.
This bearish view accounts for why several economists have marked down their China growth forecasts for 2024 and beyond. Lu Ting, chief China economist at Nomura, says GDP growth may fall “sharply” next year and dip to 4% thereafter, assuming as a US-led technological decoupling slows China’s development.
The International Monetary Fund also has trimmed its long-term forecasts for China, arguing that even 4% growth will be hard to achieve after 2025. It says structural changes in the economy are sapping momentum. State-owned enterprises, which tend to be less efficient and innovative, are expanding in strategic sectors such as technology, while sudden regulatory changes have made privately owned companies reluctant to invest. Second, consumer spending has lagged overall GDP growth, resulting in a shortage of demand for new production, which reduces the private sector’s motivation to hire and invest.
Those trends were understandable when pandemic restrictions were in force, but they’ve continued even after lockdowns ended. The pace of private-sector business investment almost came to a halt in the first quarter, with nearly all additional spending driven by state-owned companies, while growth in consumer spending trailed GDP growth by about half a percentage point.
“There’s a likelihood that the pandemic has permanently scarred household confidence and thus consumption,” says Paul Cavey, an analyst at consulting firm East Asia Econ. “The first-quarter data keep that risk alive.”
Nevertheless, it’s important to place China in a global context: Even on its slower track, the country will contribute almost 23% of total global growth through 2028, according to Bloomberg calculations based on IMF projections—more than any other nation. That makes it a focus of corporate boardrooms worldwide.
Zhu of the Shanghai finance institute reckons the world’s No. 2 economy will account for a third of global growth this year. “China is still indispensably important,” he says.
