Navigating the path to recovery and growth

Hopes that China’s economy would roar back into life once it was freed from the zero-Covid lockdowns that suppressed GDP growth last year have been sobered by reality despite improvements in economic data in Q1 2023. The pandemic has continued to disrupt the economy as Covid outbreaks hurt industrial and consumer activity in January and February. But growth is likely to pick up over the coming months as normalization sets in. 

GDP expanded by 4.5 percent in Q1, up from 2.9 percent in the final quarter of 2022. In the next few months, China’s economic data will get a boost from base effects alone, as strict lockdowns in Shanghai and other cities in the second quarter of 2022 squeezed growth to only 0.4 percent. How strong, and sustainable, the eventual post-Covid bounce will be remains to be seen. However, a sense of optimism has returned as the country opens up. 

For now, the government is keeping the lid on stimulus measures in favor of a more controlled - and slower – recovery. This is reflected in the modest GDP growth target of “around 5 percent” – a safe and unambitious target given that annual growth in 2022 hit a nearly 50-year low of 3 percent. However, it represents a missed opportunity for the government to finally drop the annual official growth target altogether.

New premier Li Qiang has his work cut out to boost confidence in the economy. Li has launched a charm offensive to woo domestic entrepreneurs and global CEOs about the prospects of the Chinese economy. Regulatory crackdowns in the tech and real estate sectors that subdued overall growth and investor confidence are leveling off. The leadership is doubling down on national strategic priorities geared to strengthen China’s prowess in manufacturing and innovation. However, this will not in itself generate enough growth or jobs. 

Revitalizing the economy remains an uphill battle. The leadership remains vigilant about risks in the financial system, so will limit stimulus measures. Meanwhile, slower export growth will also likely constrain GDP growth despite the uptick in March. 

A key factor for the strength of the recovery in the coming quarters will be the rebound in consumption and services. These sectors are crucial for GDP growth and job creation, at a time when youth unemployment remains persistently high. Faced with another record cohort of 11.6 million university graduates ready to enter the labor market this year, China’s leadership will put employment growth front and center of its thinking. Looking forward, the scope and pace of support programs for job creation and training will be a good indicator to assess the leadership’s confidence in the recovery. Managing a growing skills mismatch and diverging expectations of new job entrants poses a structural challenge to the government’s economic policies.

Macroeconomics: Service sector improvement leads the way in Q1 recovery

• GDP growth recovered to 4.5 percent in real terms in Q1 2023, the first quarter free of “zero-Covid” restrictions. Covid outbreaks left their mark in the first two months, before the situation improved in March. But China’s economy is finally leaving the pandemic induced unpredictability behind. 
• Consumption is now the backbone of economic recovery, contributing over 66 percent to GDP growth in Q1. Its importance is likely to increase over the next quarter, as services were particularly weak in the Q2 2022 reference period, when the sector contracted by 0.4 percent.