Key points
- We attach a 60% probability to a strong reopening for China in 2023, with gross domestic product growth of 5–6% likely achievable.
- China’s sharp reversal of zero-COVID should have the biggest impact on domestic demand. Stimulus policies will be an important element in economic recovery this year.
- We think that the positive impact of China’s reopening on the global economy will likely be moderate. It is unlikely to change the global trajectory on its own.
China's earlier-than-expected economic reopening following the abrupt end of the zero-COVID policy is seen by global strategists and investors as one of the defining events for 2023. In this note we consider two alternative economic reopening scenarios and their implications for (i) China's domestic economy and (ii) the rest of the world following China's dramatic pivot away from zero-COVID on December 7, 2022.
The three scenarios can be summarized as follows:
Scenario 1: Downside case (40% probability) Full/brisk pace of reopening with a cautious consumption response; economic rebound starts in the first quarter of 2023, but momentum takes time to build up as the economy faces headwinds from exports and a continuing drag from housing; likely 4%-5% gross domestic product (GDP) growth. This is lower than the consensus of around 5%.
Scenario 2: Upside case (60% probability) Full/brisk pace of reopening brings about a stronger and quicker consumption response; strong stimulus support from the government helps offset other drags and reignites confidence/optimism; full-year growth still constrained by the weak global outlook, but 5%-6% GDP growth is likely achievable.
Our downside case, Scenario 1, is for the current brisk pace of reopening since December to continue and for this relaxation to be met with a cautious response more broadly, resulting in more notable consumption increase (and rebound in growth) only from the third quarter of 2023 onward. This path takes into consideration the continued weak consumer and business sentiment more broadly and the fact that pockets of the economy have suffered (and continue to suffer) under zero-COVID and that unemployment has become a greater concern. Scenario 1 also attributes a decent amount of growth weakness to negative structural trends versus just COVID effects.
China's Trade Balance May Shrink Rapidly on Reopening
(Fig. 1) Total exports, imports, and trade balance in USD billions
As of December 2022.
Source: Haver/China General Administration of Customs.
Our upside case, Scenario 2, assumes greater optimism by the Chinese population, resulting in a faster spending response to greater mobility. This view takes comfort from the fact that household excess savings have risen notably over the past few years. The next question is where those savings are likely to be deployed. A soft landing in the global economy would also provide some support to net exports. In our view, the difference between 5% and 6% would likely come from an upside surprise to fixed investment on top of consumption, with notable policy support.
This post was funded by T. Rowe Price
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