The post-Covid recovery disappoints in Q2

China’s economy continued to struggle for momentum in 2023, disappointing hopes for a strong rebound after protracted Covid-19 lockdowns. Although GDP expanded by 6.3 percent in Q2, the relatively high growth data was largely due to base effects, as growth in the same three months of 2022 was a mere 0.4 percent. Weak demand has also put the economy on the verge of deflation. The initial optimism about the strength of the recovery of China’s economy has subsided. 

China’s Q1 performance led to initial optimism which has begun to wane. Growth forecasts from prominent investment banks have proved overly optimistic, prompting downward revisions. Annual GDP growth was widely projected at around 6 percent but the revised forecasts hover closer to 5 percent, as the tough path for any sustained recovery has become clearer.

Weak household spending continues to limit the recovery, though services and travel-related sectors showed signs of improvement in Q2. But persistent worries about employment and earnings prospects have cast a shadow on household spending. In addition, record levels of youth unemployment are a pressing challenge for the government. It is becoming apparent that the rebound is not generating the white-collar jobs university graduates are seeking. The stress on families ripples far beyond the students themselves to impact sentiment in large parts of the middle class. 

Restoring household sentiment cannot happened at the switch of a button. The lasting impact of a combination of zero-Covid measures, regulatory crackdowns and geopolitical risks have hit confidence. This makes it challenging for the government to shore up demand. Much more ambitious economic policy focused on stimulating consumer demand including expansive fiscal policy or tax breaks for households would be necessary.

During Q2, several other key sectors – not only retail – fell short of analysts’ expectations. The real estate market has yet to recover from the 2022 regulatory crackdown, and industrial output softened, including export demand. Sluggish growth is building pressure on the government to provide more economic stimulus measures. It has already resorted to its well-worn playbook of more investment in transportation infrastructure while the central bank is likely to unveil more monetary support, potentially through key rate cuts.

The government is struggling to find the optimal policy direction to improve sentiment and stimulate the economy. The aftershocks of 2022 – domestic and international - continue to leave their mark on the economy, creating a delicate situation as the recovery remains fragile and uncertain. It will be crucial to watch for policy decisions and how they impact sentiment and economic performance in the months ahead.

Macroeconomics: GDP growth disappoints amid weak recovery

• Optimism about China's post-Covid recovery has waned since the first quarter, as initial growth projections of approximately 6 percent by major investment banks have been downgraded for 2023. Although China is expected to meet its GDP growth target of 5 percent, this seemingly modest goal has become increasingly demanding to achieve. 
• Although China’s GDP growth bounced back in Q2, expanding by 6.3 percent, the economy is facing major headwinds. The recovery is struggling to gain pace with the improvement in Q2 in large part attributed to low growth in the reference period last year.