Weakening Global Economy Adds Clouds to China’s Economic Outlook

• State of China's Economy Recovery – Despite rising COVID-19 cases and a severe power crunch in August due to some of the worst droughts Southern China has experienced, industrial production and service activities continued recovering – albeit, at a slow pace. We expect to see persisting weakness in the pace of the country’s economic recovery over the coming months as a result of continued COVID flareups – especially because winter is coming – and the consequent tightening and/or reimposition of restrictions; the ongoing property downturn; and a deceleration of export growth due to the negative impact of the global economic slowdown on external demand.

• Investment Trends –  Fixed asset investment growth bounced up in August led by accelerated growth in infrastructure and manufacturing investment. On the other hand, the contraction in property investment continued. We expect that the drop in external demand will negatively impact manufacturing activity, thus adding downward pressures to manufacturing investment.

• Consumption Trends – While growth in retail sales rebounded in August on a y-o-y basis, this was mostly due to a low base effect. Month-on-month retail growth figures reveal continued weakness. On the positive side, the youth unemployment rate went down after having reached a record high in July; and consumer inflation was lower than expected, easing concerns about inflationary pressures over the near term. The outlook remains bleak, however, due to ongoing uncertainties related to the likelihood of new COVID-19 outbreaks and related restrictions. 

• Trade Trends – China’s export growth dropped substantially in August. Given the bleak global growth prospects for the rest of the year and 2023, we expect continued external demand weakness, which also dims the outlook for China’s aggregate economic recovery.

Implications for Business

While August data was stronger than expected for industrial production and fixed asset investment, ongoing headwinds such as the property downturn, COVID-19 flareups and restrictions, and a drop in external demand will continue weakening the pace of China’s economic recovery.

To make matters worse, the rising probability of more severe recessions in the US and Europe (see TCB’s StraightTalk - Wide Bands of Uncertainty) and of a deeper global economic slowdown are adding uncertainty to China’s growth outlook. We ran a scenario where we assume that the global economic growth rate drops to 0 percent in 2023 due to significant economic weakness in the US, Europe and China. Our calculations show that this would result in a 2.4 percentage-points decline in China’s GDP growth rate for 2023, from our base forecast of 5.3 percent (based on official data) down to 2.9 percent.

The Chinese Government’s policy room for counter-cyclical measures – particularly credit stimulus – to offset the impact of a potential external demand shock in 2023 are arguably limited (see TCB’s Assessing the Vulnerability of China’s Economy to External Disruption). Against this backdrop, government pro-growth measures throughout 2023 and beyond will more likely be geared at stabilizing employment and inflation, rather than targeting to reverse the downward growth trajectory.

Businesses need to prepare for a scenario of continued economic weakness, subdued domestic and external demands, and rising uncertainty due to COVID-19 and the potential of a worse-than-expected global slowdown.