The year 2019 was a difficult one in China. The country’s economy faced multiple setbacks, especially its retail sector. Growth slowed significantly, and many people lost hope in the Chinese economy. However, things look brighter for the country’s economy in 2023. Read to find out how recovery will be different for China in the coming years and why it is important for investors to track this space closely.
"China's economic recovery in 2023 may have gotten off to an uneven start, but the nation's resilience and determination to succeed make a full recovery not just expected, but inevitable."
Outlook for China's economy in 2023
Fitch Ratings forecast retail sales in China to grow by mid-single-digit in 2023, from a low base of 6.5% in 2022 (6.3% forecast for 2022). The forecast is based on a base case scenario with less severe Covid-19 pandemic-related controls and pick-up in discretionary spending as retail sales recover. Under this case, retail sales growth would be supported by a recovery in consumer sentiment, the gradual normalization of economic growth, and depreciation pressure.
According to Fitch Ratings, retail sales growth would be faster than GDP growth over the forecast period mainly on account of increased spending on discretionary items amid rising income levels. Retail sales growth of 2.8% in 2022, based on their “base” scenario that assumes no significant economic shocks and an economy with relatively moderate structural pressures. Furthermore, no major changes in retail sales dynamics through 2023.
Outlook for Retail Sales in 2023
Retail sales are expected to be negatively affected by inflation and geopolitical concerns in 2023. As a result, consumers may opt to trade down to cheaper or discounted items to reduce their spending. However, the luxury sector is likely to remain strong, with companies that can adapt to increasing complexity by updating their operating models and strategies likely to be best placed to weather the coming storm. Besides, newbie investors are shying away from "own research" after the stock market rally in 2018 and subsequent correction in 2019; instead, they are opting for safer investment options such as mutual funds and ETFs. This could lead to higher risk-based costs for retail investors.
However, there are some opportunities for investors looking for longer-term growth opportunities in the retail space. For example, new technology that supports personalized shopping experiences is expected to have a positive impact on retail sales over the next few years.
Inflation and Interest Rates
The outlook for China's economy in 2023 is mixed. Inflation is forecasted to remain subdued, averaging just 2% compared to 2.2% in 2022. However, the government has made infrastructure construction a priority for 2023, and is deploying a mixed funding source to support the implementation of urbanization in the counties. The Chinese economy is expected to experience a sluggish recovery in 2023, with GDP growth forecasted to be below the global average.
This will be due to slower domestic and external demand and a depreciating currency. On the other hand, new car purchases are expected to remain below pre-pandemic levels in 2023. Also, the housing market is predicted to remain depressed, as household debt levels have risen following last year’s economic slowdown.
However, the government has made infrastructure construction a priority for 2023, and is deploying a mixed funding source to support the implementation of urbanization in the counties. Besides, the Chinese economy is expected to experience a sluggish recovery in 2023, with GDP growth forecasted to be below the global average due to slower domestic and external demand and a depreciating currency.
On the other hand, new car purchases are expected to remain below pre-pandemic levels in 2023. Additionally, the housing market is predicted to remain depressed as household debt levels have risen following last year’s economic slowdown.
Impact of Technology on Chinese Economy
The technology sector in China has been hit hard by recent policies aimed at reducing the country’s reliance on foreign technology. The Hang Seng Index, a widely-tracked stock index that includes some of the country’s leading tech companies, has dropped over 50% since the beginning of 2021. Much of this decline has been attributable to falling share prices from companies such as Huawei, ZTE, and Lenovo, which have been caught in the crosshairs of recent U.S. trade tensions. The prolonged trade war and related regulatory tightening have caused an unexpected slowdown in China’s tech sector.
While growth is expected to be gradual in the short-term, economic recovery is expected in the long-run as COVID normalizes the economy and companies adjust to growth slowing down from its peak levels. The weak investment climate in China’s private non-state sector has contributed to slower growth of the local economy.
Domestic firms with foreign investment are particularly vulnerable to regulatory uncertainty and harsh enforcement of antitrust rules due to fears of being targeted for foreign takeovers or national security reviews. Technology-driven firms like Alibaba and Douyin have been punished with large fines as a result. However, technology will continue to play an important role in China’s future growth and development.
Economic Growth Forecast
The International Monetary Fund (IMF) has recently increased its forecast for China’s GDP growth in 2023 to 5.2%. This is up from a previous forecast of 4.6%, and higher than the country’s average growth rate over the past few decades. The IMF expects China’s economy to rebound in 2023, but growth is still expected to fall short of its potential. In addition, if there had been no pandemic, China’s GDP in 2023 would be 22.8% larger than it was in 2019.
The logistics industry is one area that will continue to see significant growth in China in the coming years. Logistics revenue is predicted to reach RMB 350 trillion by 2023, which would be more than double its current value. This increase in revenue would help support economic growth and support jobs for the future. The outlook for China’s economy in 2023 remains uncertain but appears to be on a path toward recovery.
1. China's Economy: Challenges Ahead
China's economy may be on a long-term growth trajectory, but the deceleration of its economic growth has become a pressing issue for policymakers and investors. China’s gross domestic product (GDP) growth rate is projected to slow down to 6.6 percent in 2018 from 6.7 percent in 2017, according to the National Bureau of Statistics of China. In the pre-COVID decade, GDP growth was driven by an exponential increase in the country’s investments and debt-driven consumption, but this has come to an end.
The country’s debt-to-GDP ratio is rapidly increasing, and its GDP growth still cannot cover its increasing expenses. When it comes to consumer confidence, it has been hovering at historic lows in 2022 with no signs of improvement despite years of robust economic growth. The Chinese government has taken many steps to support the economy rebound, such as setting up special economic zones and launching large-scale infrastructure projects.
However, they are insufficient to boost the economy’s momentum and growth rate. Furthermore, factors such as population aging, economic restructuring, and geopolitical tensions will continue to negatively influence China's economy. These challenges will make it difficult for China’s tech industry to sustain healthy and rapid growth through 2023.
2. Economic Recovery: What to Expect
The economic recovery in China is expected to be uneven in the near term, with consumer spending and retail sales likely to increase. - Many companies are investing in nearshoring, in-store supply stocking, and agile operating models to meet shortages of products and resources as shortages develop. This will enable them to respond more quickly and effectively to market changes. In 2017, organic growth is expected to be strong, with companies deepening relationships with their existing clients rather than expanding geographically. This will help them strengthen sales and profits.
As for financial markets, the launch of the personal pension program and the further opening up of the bond market will bring new vitality to the financial sector. More investments from domestic and foreign investors will help maintain healthy economic growth in China.
3. Uneven Recovery: What Does It Mean?
The uneven recovery in the Chinese economy is seen as a temporary slowdown in growth. In February 2021, private activity strengthened as residents returned to work after an extended Lunar New Year break, while industrial activity lagged. The economic growth momentum in February 2021 was maintained at the same pace as January. Government subsidies at the end of 2020 spurred a rush of car purchases that sapped demand in the new year. Spending on restaurants in 2021 rose 24.7% compared to 2019 levels. As spending slowed down during the lunar year, retail sales posted a year-on-year growth of 11.99%. However, spending on residential dwellings slowed down by 2.19% due to limited supply of housing units and low prices of real estate properties.
4. Government Initiatives to Support Growth
Local governments have released economic targets for 2023 that are lower than those for 2022, by between 0.5 and 1 percentage point. The UK is planning to introduce a 11 billion stg business tax break in the upcoming budget, which will be aimed at boosting investment and growth. The launch of the personal pension program, further opening up of the bond market and restoring consumer confidence are expected to bring new vitality to China's financial sector.
This is expected to provide a more realistic growth projection for 2023, between 5% and 6%. This is lower than pre-COVID growth but within the government's 2022 target range. Besides, a more balanced economic development across regions is also needed for sustainable growth. To support this goal, local governments have been implementing policy measures to develop key sectors such as agriculture, innovation and technology, infrastructure, renewable energy and resource conservation. A more balanced economic development across regions will also help reduce income inequality in China and boost people’s well-being.
Background of China's economy
With GDP growth of 3.9% year-on-year in July-September, it is evident that the Chinese economy is far from out of the woods. Although this growth rate is higher than the target set by the government, it indicates that the economy is still on a shaky footing. Moreover, COVID-19 and related measures have caused significant damage to China's business environment, prompting a gradual and incomplete economic normalization in the short run. This has led to labor shortages and high unemployment, particularly amongst youths. The external demand outlook is also questionable in the fourth quarter of the forecast period, making it challenging to revive domestic economy. Also, fiscal and monetary policies are on course to stimulate investment and consumption to aid growth recovery. However, this may have an impact on debt sustainability, which could result in a debt crisis or financial instability.
Key trends in China's economy in the coming years
In 2018, the International Monetary Fund raised its estimate for China's GDP growth in 2022 to 5.2%, citing a faster-than-expected recovery after reopening that had boosted global demand for Chinese-made goods. China’s logistics industry is forecast to remain steady in 2022, with total revenue estimated at around RMB 336 trillion. Global demand for Chinese-made goods will continue to rise in 2022, despite power rationing and strict lockdowns in the country. In terms of economic growth, China’s GDP growth rate is expected to reaccelerate in 2023, reaching RMB 350 trillion. This is due to an economic recovery following last year’s accession to the World Trade Organization. However, structural and cyclical headwinds are expected to limit this growth rate below its potential in 2023.
Challenges and threats to China's economy
Economic growth in China is expected to remain sluggish in 2023 due to the impact of Covid-19, with consumer confidence and external demand suppressed. The Covid-19 pandemic and containment measures, a collapsing property market, and weaker external demand all contribute to the slowdown of economic growth. Fixed-asset investment has decelerated due to disruptions caused by the pandemic, with particular weakness in the non-state sector. There is uncertainty about the path of China's exit from its zero-Covid policy and the trajectory of the economy in 2023. Despite these challenges, it is unlikely that China will experience a hard landing in 2023.
It has ample reserves, sufficient foreign currency holdings, a sound financial system, and a highly efficient monetary authority. Therefore, it should be able to weather any adversities arising from its economic recovery.
Outlook for China's economy in the coming years
The outlook for China’s economy in the coming years is uncertain due to various structural factors, such as the large and growing elderly population, industrial upgrading, and global economic slowdown. The economy recovered in Q3 of 2020 but the mixture of structural and cyclical headwinds suggest that growth in 2023 will be lower than its potential. The IMF raised its estimate for 2021 GDP growth to 5.2%, citing a faster-than-expected recovery after reopening. The rebound in 2022 is likely to be more muted than in 2021 due to weak consumer outlook for employment and household income. However, this forecast may change as China continues to implement reforms aimed at addressing pressing issues, such as growing income inequality, environmental protection, and financial stability.
What is driving China's economy?
The Chinese economy is currently showing signs of recovery, following a decade-long boom. This year, China's total logistics revenue reached RMB 247 trillion, improving the year-on-year growth rate to 15 percent. The government has maintained stable economic growth through macro-financial policies and fiscal stimulus. Despite sluggish global demand, China's GDP expanded by 6.7 percent in 2017.
Over the next few years, the country’s economic recovery is expected to be gradual as it struggles with its debt burden and a low base of comparison. One factor driving the economy is strong domestic demand from fast-growing industries such as housing, retail, and light industries. In addition, the government’s fiscal stimulus and infrastructure investment are expected to support economic growth in coming years. However, consumer confidence is still relatively weak due to recent hiccups in the economy and last year’s severe influenza pandemic that had a dampening effect on media-term consumer spending (which adds up to GDP).
Chinese economy in 2025
China’s economy is forecast to grow by 4.7% in 2023, with a higher-than-average growth rate of 6.5%. This is significantly higher than the projected growth rates of other major economies, such as the US (3.2%), the EU (2.2%) and Japan (0.6%). The rising demand for labor and capital has led to a pick up in China’s domestic demand and investment, which have been fueling its economic growth. With a strong domestic market, China’s businesses are also growing more rapidly, and this is helping to stabilize the country’s economy.
The GDP growth forecast for 2023 largely depends on China’s structural reforms, which would help to lessen the impact of the pandemic on economic activity and sustainably raise economic growth over time.
Challenges China faces in the coming years
China's economy is forecast to grow at an annual pace of 6-7% in the coming years, down from earlier expectations of around 7-8%. This forecast is due to a slump in exports and slowdown in the growth of the domestic property market. Further, there are potential geopolitical risks including investors being blocked from buying Chinese tech stocks and companies being nationalized.
There could also be supply chain disruptions as the government tries to diversify sources for key materials. Structural factors such as population aging and industrial upgrading will also restrict China's growth potential in the coming years. China's top leaders have warned of "triple pressure" from shrinking demand, supply shocks, and weakening expectations.
What factors will determine the success or failure of China's economic recovery?
The IMF will raise its estimate for China’s 2021 GDP growth by 0.5 percentage points to 5.2%. The forecast is based on a faster-than-expected recovery after the country reopens its markets following a year-long import ban. The recovery starts with consumption and retail sales growing by 12.4% in 2019 Q4, which is 0.7 percentage points higher than the previous quarter. This marks the start of an economic turnaround that was decelerating in the pre-COVID decade.
The forecast also factors in a stable outlook for growth in consumer confidence, which has been on a steady rise over the past few months as concerns about wage growth and external demand eased. The forecast also looks at increased global trade and stronger domestic demand, which could buoy GDP growth towards 6%. In terms of economic headwinds, Europe’s debt crisis and trade tensions between China and other countries have dampened global economic growth and are likely to have an impact on China’s economic recovery.
How will China's economic recovery affect global investors?
The IMF raised its estimate for China's GDP growth to 5.2% in 2021 from 4.4% in October. This is the second time that the IMF has revised upwards its forecast for China’s economic growth this year, following a downward revision in October last year. In addition, retail sales revenue in China increased by 12.4% YoY at end-February as compared to end-January 2019. This is the first time since 2012 that retail sales revenue has risen over 11% YoY. The buoyant demand for consumer goods and services, coupled with a pick-up in economic growth, is likely to support retail sales growth going forward.
However, sectors hit hardest by mobility restrictions and weak consumer sentiment are likely to benefit from the recovery in consumption. It will take time for consumer confidence to reach pre-Covid levels, limiting medium-term consumer spending. The positive momentum in China’s economy will benefit global investors by delivering higher returns to equity investors and stronger global growth over the forecast horizon. Besides, the government’s emphasis on financial stability and improving the supply-side structure could help boost economic activity and investments. As a result, retail sales revenue is expected to rise over 12% YoY through 2023.
What are some key factors that will determine the speed and extent of China's economic recovery?
The recovery is on track so far. The International Monetary Fund has raised its estimate for GDP growth this year to 5.2%, citing a stronger-than-expected recovery after reopening its doors following the global recession. But consumer outlook for employment and household income will be paramount for recovery, and is dependent on China's pandemic-related policies. Consumption levels have seen some growth during the Chinese New Year holiday, with travel-related activities, box office results, and hotel sales revenue all increasing. But luxury shops have seen queues of shoppers, but the general consumer base remains cautious due to uncertainty over wage growth. Overall, the economy appears to be on track for a gradual recovery, but it will be an uneven one.
Structural reform
The speed and extent of China's economic recovery will depend largely on the implementation of structural reforms. This marked improvement in economic activity stems from increased consumer spending, improved export performance, and a rebounding housing market, as well as structural reform initiatives implemented by the government over the past several years.
These include commercializing state-owned enterprises and implementing new policies to support private enterprise. Unfortunately, substantial challenges remain, including excessive local government debt levels and elevated levels of corporate debt, which may pose a threat to sustained growth. To further support economic growth and address potential challenges, the government has implemented a range of structural reforms that seek to promote a more competitive and sustainable economy, such as streamlining regulations for small and medium-sized enterprises, improving the business environment for foreign investors, and opening up markets for private enterprises. Such measures are essential if China is to continue making progress in its economic transition and ensure steady job creation and prosperity for its citizens.
Economic growth
The key factors that will determine the speed and extent of China's economic recovery are its economic growth rate, as well as its investment and growth in non-state sectors. In recent years, China's economy has decelerated significantly and is expected to continue doing so in the coming years. This is largely due to a range of external factors including slowing global growth, a property market crisis, and pandemic disruptions.
However, there are some tailwinds that could help support economic growth going forward. One such factor is the government’s ongoing efforts to address pandemic-related policies, which aim to better target containment measures and reduce economic disruption. This includes increased infrastructure construction to ensure supply chain security, improved disease surveillance, and re-training of healthcare workers.
Another advantage for China’s economy is its strong private sector, which includes domestic private enterprises as well as firms with foreign investment. This sector accounts for more than half of total economic activity, and it will be vital in driving economic growth going forward.
Financial stability
The Chinese economy is recovering from the impact of a downturn in recent years, but there are still challenges to overcome. The government's focus on financial stability and maintaining stable growth has helped support growth in recent years. One factor that has helped drive this recovery is strong consumer spending. Over the Chinese New Year holiday, consumer spending increased 12.4% year-on-year, compared with 2019.
This was largely due to increased spending on retail items and services such as restaurants and hotels as well as transportation and entertainment. Another important factor contributing to the economic recovery is the manufacturing sector, which lags behind due to weak external demand. However, private activity is strengthening as residents return to work following extended holidays during the Lunar New Year period. This has led to greater consumption at restaurants and shops, which in turn supported growth in the retail and service sectors over the Chinese New Year holiday.
Despite these positive factors, housing markets have remained depressed in many regions of China, leading to reduced demand for construction materials and services. This issue has had a significant impact on industries across the economy and poses a challenge for the country's economic recovery going forward.
Inflation and currency exchange rates
China's consumer price index (CPI) increased to 2.8 percent year-on-year in September, indicating subdued price pressures compared to other western economies. This is mainly due to the government's efforts to curb inflation and maintain a stable growth rate. The Chinese economy faces some challenges, but it remains one of the fastest growing in the world. The IMF estimates that China's GDP growth will reach 5.2 percent this year, which is higher than the 4.4 percent projection in October.
This is mainly due to strong domestic demand and robust investments from both the public and private sectors. However, growth is expected to slow down in 2018 as Beijing focuses on reforms and rebalancing the economy away from investment and exports toward consumption and services. Inflation is also expected to moderate to an average of 2 percent by 2023, potentially helping the country's economic recovery.
Conclusion:
China's economy is recovering, but growth is expected to be relatively sluggish in the next few years. In order to improve job security, economic stability, and overall prosperity, the government needs to enact more wide-ranging changes. To boost domestic demand and reduce reliance on exports, China's policymakers should make structural reforms that help level the playing field for foreign investors and private firms. The retail market will be an area of focus as retail sales continue to recover and companies begin to expand their sales channels beyond traditional retail outlets. However, it will take time for retail sales to return to pre-crisis levels.
Frequently Asked Questions:
What are the key challenges facing China's economy in the coming years?
The key challenges facing China's economy in the coming years are population aging and industrial upgrading. These two phenomena will constrain China's economic growth in different ways, causing disruptions all along the supply chain.
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