China’s economy rebounds more than expected

• China’s better than expected GDP growth in the first quarter was spearheaded by a sharp rebound in consumer spending, especially in services, non‑durable goods and semi‑durable goods. 

• This rebound, however, seems largely self‑contained. Weak goods imports (on a nominal basis) are evidence that the strong headline growth number has not translated into wider regional (or global) economic momentum.

• Real GDP growth will accelerate in year-on-year terms in April‑June, driven partially by a low base of comparison. However, we expect quarter-on-quarter growth to slow, reflecting a fading in initial momentum derived from China’s post‑pandemic reopening. 

• Other challenges will emerge later in 2023, including an industrial sector mired in overcapacity and a mixed recovery in the property sector, as well as high youth unemployment, which rose to 19.6% by end‑March—despite the strong economic recovery over the first quarter.

China’s economy beat our expectations to grow by 4.5% year on year in the first quarter, according to data released by the National Bureau of Statistics (NBS). The reading, underpinned by strong consumer spending and a surprisingly large trade surplus, means that we may upgrade our growth forecast for 2023, which currently stands at 5.7%. EIU expects year-on-year growth to accelerate in the second quarter, particularly on the back of a low base of comparison in the same period in 2022, but economic momentum will fade in the second half of 2023 as a number of challenges become clearer.

Consumer spending spearheaded China’s rebound

Consumption saw the strongest recovery following China’s relaxation of its zero-covid policy, contributing 66.6% to the real GDP growth recorded over the first quarter. Retail sales recorded 10.6% year-on-year growth in March, the fastest rate since July 2021. Services led this recovery, with catering sales surging by 13.9% in January‑March amid “revenge spending” following the withdrawal of covid‑19 restrictions. As we have long highlighted, however, the sales recovery in non‑durable and semi‑durable goods has outpaced spending in durable goods, particularly in segments linked to offline social activities, such as textiles and sports goods. Sales of gold, silver and jewellery bucked our expectations of a more-muted recovery in segments of the luxury market, although this may reflect recent anxieties tied to global financial disruptions, with gold prices having rallied following the collapse of the US‑based Silicon Valley Bank in March.

Consumption trends nonetheless highlighted an imbalanced recovery among different income groups. Real GDP growth outpaced average real household income growth in the first quarter, suggesting that the strong economic performance has not yet translated into an improvement in household incomes among lower-income groups. Although the overall unemployment rate decreased marginally, a recent survey conducted by the People’s Bank of China (PBC, the central bank) illustrated significant weakness in household confidence for future income, hinting at caution in future spending patterns.

China’s rebound looks largely self-contained

China does not publish quarterly national accounts data, but we estimate that the upside surprise in China’s goods export growth in March drove much of the headline real GDP number, with strength in outbound shipments mirrored by robust readings for industrial output that month. We are, however, concerned by some conflicting signals in Chinese industrial and trade data. Separate trade data on the value of delivery for exports by large industrial enterprises (that is, those with revenue exceeding Rmb20m, or about US$3m), for example, fell by 5.4% year on year (in renminbi terms) in March—an almost 30‑percentage‑point difference with the headline renminbi-denominated goods export figure that same month (at 23.4%). 

The discrepancy in these figures usually ranges from around four to seven percentage points throughout the year, and is usually higher in March, likely as a result of reporting distortions from the Chinese New Year period. The figures for March 2023 nevertheless posted the largest discrepancy since 2010. We are sceptical that this gap can be bridged via strong export growth by smaller enterprises, which are not reported by the NBS, given the challenging global demand environment. Benchmarking China’s export figures against import data reported by its major trading partners—particularly in South‑east Asia, where Chinese exports grew by 17.9% year on year (in US dollar terms) in the first quarter—may be illuminative of potential discrepancies. An examination of April trade data, given the potential lag in trade statistics reporting from March, will be instructive.

Regardless of these data trends, China’s strong headline growth number has not translated into wider regional (or global) economic momentum. Average growth in goods imports fell by 7.1% year on year in January‑March (in US dollar terms), affirming our earlier warnings that China’s reopening would provide shallower support to the global economy in 2023 than in previous years. Firms operating within China therefore look better placed to benefit from the country’s post‑covid consumption rebound, partly as supply chains have developed onshore and demand has tilted towards domestic brands. By contrast, many overseas exporters may continue struggling with tepid Chinese import demand in the coming months. Although recent import trends suggest that some of these pressures are receding, we retain a relatively bleak outlook for China’s commodities imports for 2023, given our expectations of sustained downward pressure on Chinese investment activity this year. 

Three challenges to watch out for in 2023

Year-on-year growth will accelerate in the second quarter, owing to lockdown-induced base effects from April‑June 2022, but we expect sequential (quarter on quarter) growth to slow over that period. Although China’s economic fundamentals will improve over time, especially as the labour market strengthens, lingering challenges could re‑emerge as the initial post‑pandemic recovery momentum recedes.

In particular, the latest data affirmed our persistent concerns over the industrial sector in 2023. Real industrial value‑added increased by 3% year on year in January‑March, lagging behind the improvement in services. This was driven by a few industries where Chinese enterprises are enjoying an export boom, including in cars (13.5%) and electric machinery (16.9%). Alarmingly, however, our analysis finds that capacity utilisation levels in eight out of 13 manufacturing industries lie in the bottom quintile of historical data. These overcapacity strains probably reflect both the slowdown in the global economy as well as policy-driven capacity expansion in recent years. As demand slows, overcapacity is intensifying competition—especially among automakers—and will hold back future fixed-asset investment (FAI) by manufacturers. 

In addition, housing market challenges remain even as new home sales and overall prices have rebounded. Growth in new home sales (4.1% year on year in January‑March) was probably facilitated by an acceleration in housing completions, which soared by 14.8% under government efforts to deliver unfinished projects. However, construction remains weak: property FAI slumped by 5.8% over the same period, while new home starts declined by a deeper 19.7%. Land acquisition, a leading indicator of house development activities, also continued to fall by double digits in the first quarter. We therefore maintain our expectations of a full‑year contraction in property FAI, which will act as a net drag to the economy for a second consecutive year. 

Finally, China’s strong economic rebound has also failed to alleviate the high youth unemployment. The monthly surveyed unemployment rate for those aged 16‑24 years rose sharply in March, to 19.6%, exceeding the 16.7% rate recorded in December 2022 (and posting its second-highest level on record). Structural factors explain some of this, including a long‑standing supply glut of university graduates, even as Chinese factories have struggled with labour shortages. Nevertheless, we interpret higher youth unemployment as affirming our view of the uneven nature of China’s ongoing recovery. Sluggish investment by the private sector, which contributes to nearly 90% of urban job creation in normal years, will continue to put a cap on youth employment.

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