• Consumption Trends – The double-digit contraction in April may indicate a bottom for the year, but we expect only modest growth recovery in the months ahead due to the dual drags of declining household income growth (mostly a function of weak employment growth) and rising consumer inflation (particularly for food).  

• Trade Trends – Domestic production disruptions due to COVID lockdowns plus weakening external demand are weighing on China’s export growth – April saw export growth drop from 14.7 percent y-o-y in March to 3.9 percent. Global trade growth is expected to weaken substantially this year and may persist into 2023 due to uncertainty about the course of the Ukraine war (see WTO forecast). The recent sharp depreciation of the RMB may heighten capital outflow pressures for financial investors. Nevertheless, TCB’s CEO confidence survey, released this month, suggests that real-economy investors plan to continue investing in China (see The Measure of CEO Confidence™ for China).

Implications for Business

The worst of the COVID shock may have occurred in April, but stringent mobility controls are far from over. Just as critical, China’s current economic recovery is unlikely to be as strong as the recovery that followed China’s first COVID shock in the 2H 2020.  At that time, China’s real estate sector was still booming, and Chinese exports were surging in response to global COVID-related demand. Both growth drivers are now spent, and real estate has already turned into a drag on the economy.   

Given new measures to counter economic shocks, we expect to see a modest rebound in the second half of the year, but it won’t be enough to achieve a “near 5.5 percent growth rate” in 2022, the government’s official target.  In May, we revised our GDP forecast to 4.5 percent, but this adjustment bears downside risk should COVID disruptions continue as per current, in the 2H. Companies should plan for persistent “down market” conditions lasting through year-end.