China economic update: Potential to pick up pace in 2023?
The confirmation of Xi Jinping’s third term as leader of China presents an opportunity to take stock of the world’s second largest economy. While Deloitte Access Economics expects that many developed countries may fall into recession in 2023, China has the potential to deliver stronger economic growth than seen in 2022. With a lacklustre performance in 2022, the country enters 2023 from a relatively low base and with potential for higher economic growth.
Chart 1: Economic growth in major economies for 2022 and 2023
Source: Deloitte Access Economics
Recently released data shows that the Chinese economy grew by 3.9% over the year to September 2022. This is an improvement from earlier in the year but still well short of the 5.5% guidance target set by the government. Economic activity has been subdued by the zero-COVID policy, and with the government reiterating its commitment to this approach, the recovery timeline is uncertain. That said, Hong Kong’s share market jumped over the past week upon rumours the zero tolerance for COVID policy may be on the way out. Though the claims were denied, the rally signals the expected response when China does relax its approach to COVID. The 2023 growth potential in China also stems from the fact that it isn’t seeing the same inflationary pressures as in the US and Europe, hence interest rates haven’t needed to rise (in fact they have fallen through 2022). Lower interest rates will be important for stimulating activity once COVID restrictions in China do subside.
It is also likely that China’s government may employ fiscal measures to tackle economic challenges and stimulate consumer spending.
Consumer sentiment has currently bottomed out but is expected to pick up in 2023 as consumers unleash pent-up demand from 2022. An increase in consumer spending in China would increase demand for Australian exports in the medium-term. However, we likely won’t see the sort of commodity demand that we did after the 2008 global financial crisis as China’s growth in 2023 may be more consumer led, rather than infrastructure and industrial led (where there is still considerable spare capacity).
The outlook in 2023, though brighter than in 2022, is set against the backdrop of ongoing turmoil in China’s property market and high levels of public debt linked to property. COVID exposed cracks in the credit bubble, triggering debt defaults and placing major property developers at severe financial risk. The real estate sector represents almost a quarter of GDP and remains plagued by supply-side constraints and mortgage boycotts. Relaxed monetary policy may stimulate business investment, but the real estate downturn will likely still weigh on broader economic growth in 2023.
Looking past the current crisis, China also faces structural concerns which will continue to detract from growth in the medium to long-term. With an ageing population and low fertility rates, younger families will have to increasingly front the costs of the retiring ‘baby boomer’ cohort. A short-term economic rebound will not alleviate these structural issues.
