China’s economy resilient amid COVID-zero turmoil
Precautionary buying by consumers clearly aided GDP in Q4; but underlying detail is consistent with robust and sustainable growth through 2023 and 2024.
China’s economy materially exceeded expectations in the final quarter of 2022 despite the upheaval caused by COVID-zero’s abrupt end.
Whereas Bloomberg’s consensus estimate for quarterly GDP was a 1.1% decline, activity was unchanged in Q4. Annual growth to December 2022 consequently came in at +2.9%, or 3.0% on a year-to-date basis. While a long way off authorities’ initial target for the year of 5.5%, given the degree of uncertainty faced by economic agents throughout 2022, this is a strong result.
The partial data released with GDP is instructive on the composition of activity in the quarter.
Growth in retail sales was the biggest surprise, coming in at -1.8%yr at December against an expectation of -9.0%yr. This headline outcome jars with the turmoil and fear reported across major cities as COVID-zero was abandoned, but the survey detail makes sense of the situation.
Whereas services such as catering came under substantial pressure as fear over the virus spread (annual growth falling from -8.4%yr at November to -14.1%yr in December), this decline in activity was offset by precautionary buying of medicine (+39.8%yr at December from +8.3%yr in November) and food (+10.5%yr at December from +3.9%yr in November).
The end of COVID-zero meanwhile looks to have had little immediate effect on fixed asset investment, with the annual rate at December broadly in line with that of November, respectively +5.1% and +5.3% on a year-to-date basis. Importantly this is inclusive of the 10% decline in residential construction experienced in 2022, with infrastructure (9.4%) and manufacturing (9.1%) more than offsetting.
Highlighting the rapid transformation of China’s productive capacity currently underway, the NBS emphasised in their update that investment in high-tech manufacturing and services grew by an extraordinary 22.2% and 12.1% respectively in 2022. Clearly, opportunities to expand into new markets remain plentiful for Chinese firms both at home and abroad, and industry as well as authorities are determined to take advantage.
Looking to 2023, clearly the rapid growth in medicine and food spending by households is likely to reverse quickly. However, with anecdotes pointing to fading concern over the virus’ spread and consumers now free to travel as they desire, the rest of the consumer basket is likely to show strength. Importantly, unlike the developed world, per capita real disposable household income growth is strong (+2.9%yr in 2022) and the investment currently being undertaken by industry implies these gains will continue into the medium-term. Precautionary savings accumulated through the pandemic are also likely to be spent in coming quarters, albeit likely at a more modest pace than in nations like the US where fiscal largesse added temporarily to consumer spending power.
Overall, the December data round supports our long-held view that China’s economy is well positioned to not only rebound from Covid-zero, but also to grow strongly into the medium-term, averaging growth of 5% or more through 2022-2024. With the UK, Europe and US all likely to experience recession or stagnation and weak recoveries during 2023 and 2024, China’s geopolitical and economic strength will continue to grow.
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