A strong start for China in early 2022 has given way to weakening second half prospects, dented by multiple Covid-19 outbreaks that have dragged the economy of the trading powerhouse down.
In its latest China report – Between Shocks and Stimulus – the World Bank has predicted that real GDP growth will slow sharply to 4.3% in 2022 – 0.8% lower than projected in a December outlook. The downgrade reflects the “economic damage caused by the persistence of Covid-19”, said the report. This compares with growth of 8.1% in 2021 and falls short of the government target of 5.5%.
While growth is anticipated to rebound to 5.2% in 2023, the risks to China’s growth are unevenly balanced and downside risks prevail. “The re-emergence of new, highly transmittable variants of Covid-19 could lead to more prolonged economic disruptions,” said the report. “Risks could also stem from persistent stress in the real estate sector with wider economy-wide consequences.”
However, on the upside, if the pandemic is brought under control and domestic restrictions are fully lifted, full year growth could be “higher than currently projected, thanks to the recently announced additional stimulus measures”, said the World Bank.
The prediction of 5.2% growth in 2023 rests on several assumptions, namely China maintaining its zero Covid strategy; China continues to experience recurrent Covid outbreaks, but they are less disruptive and costly than in the second quarter of 2022; activity normalises but only gradually in the third quarter of 2022; and no further additional fiscal stimulus are applied.
Imports and exports
On the trade side, demand is expected to shift in favour of domestic demand and net exports will play a “negligible role” in supporting economic growth. Industrial production, meanwhile, is expected to remain the main driver of economic growth in China.
A growth slowdown of the magnitude forecast by the World Bank will have an impact on government’s policy efforts to rebalance the economy and meet growth targets. “An aggressive countercyclical policy response to slowing growth could escalate medium-term macro-financial risks,” noted the World Bank. “In this environment, traditional policy support, including accelerating infrastructure spending, channelling credit to SOEs, and rekindling the real estate sector, could undo rebalancing efforts, impair hard-won gains in economic deleveraging, and worsen the housing market’s supply overhang.”
These could further disrupt economic activity, increase policy uncertainty and potentially lead to fragmentation in global trade. The World Bank projects that global growth in advanced economies will decelerate from 5.1% in 2021 to 2.6 percent in 2022, while growth in emerging market and developing economies is projected to drop from 6.6% in 2021 to 3.4% in 2022. Global trade growth is projected to slow to 4% year-on-year in 2022.
“China is expected to face a sharp decline in global demand as growth in major economies slows and global trade growth falls below 5%,” said the report. “Export growth is projected to moderate from last year’s high, as the base effect becomes less favourable and global demand weakens. In addition, supply-side constraints—including the global semiconductor shortage, shipping disruptions, and high freight rates—are expected to persist for some time and weigh on exports, especially in 2022.” Import growth is also expected to “remain subdued” amid weak domestic demand and supply chain disruptions.
China’s exports grew 16.9% year-on-year in May, according to official statistics, as factories restarted and logistics bottlenecks eased after authorities relaxed some Covid curbs in Shanghai. This marked the fastest growth since January 2022. Imports also rose (3.9%) for the first time in three months.
Last month, Fitch Ratings cut its forecast for China’s 2022 GDP growth to 4.3%, from 4.8% and revised its 2023 growth forecast slightly higher to 5.2%, from 5.1%, on the assumption that the government will phase out its ‘dynamic zero-Covid’ policy only gradually over the course of next year.
The World Bank points out that while China has the macroeconomic capacity to address the growth slowdown, the challenge is how to make any policy stimulus effective while lockdowns persist.
Further, China traditionally favours boosting growth through debt-financed infrastructure and real estate investment, a growth model the World Bank describes as “ultimately unsustainable”. Instead, it proposes that policymakers shift more of the stimulus onto the balance sheet of the central government and direct public investment towards the greening of public infrastructure.
“High levels of indebtedness of corporates and local governments limit the effectiveness of policy easing and store up further risks down the line,” said Ibrahim Chowdhury, World Bank senior economist for China.