Further weakening of the Chinese economy

A China’s strong start to 2022 gave way to a weaker outlook for the second half of the year, rocked by multiple Covid-19 outbreaks that dragged the trade powerhouse economy down.

In its latest China report – Between Shocks and Stimulus – the World Bank predicted that real GDP growth will slow sharply to 4.3% in 2022, 0.8% lower than projected in the December outlook. The downgrade reflects the “economic damage caused by the persistence of Covid-19”, the report said. This compares to growth of 8.1% in 2021 and falls short of the government target of 5.5%.

While growth is expected to rebound to 5.2% in 2023, risks to Chinese growth are unevenly balanced and downside risks prevail. “The re-emergence of new, highly transmissible variants of Covid-19 could lead to more protracted economic disruptions,” the report said. “Risks could also stem from continued stress in the real estate sector with wider consequences for the wider economy.”

However, on the upside, if the pandemic is brought under control and national restrictions are fully lifted, full-year growth could be “higher than currently expected, thanks to the additional stimulus measures recently announced”, he said. said the World Bank.

The prediction of 5.2% growth in 2023 is based on several assumptions, namely that China maintains its zero Covid strategy; China continues to experience recurring Covid outbreaks, but they are less disruptive and costly than in Q2 2022; activity is normalizing but only gradually in the third quarter of 2022; and no other additional fiscal stimulus is applied.

Imports and exports
On the trade side, demand is expected to shift in favor 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 slowdown in growth of the magnitude predicted by the World Bank will impact the government’s policy efforts to rebalance the economy and meet growth targets. “An aggressive countercyclical policy response to slowing growth could heighten medium-term macrofinancial risks,” the World Bank noted. “In this environment, traditional policy support, including accelerating infrastructure spending, channeling credit to state-owned enterprises and reviving the real estate sector, could undo rebalancing efforts, jeopardize hard-won gains in economic deleveraging and exacerbate the oversupply of the housing market”.

These could further disrupt economic activity, increase political uncertainty and potentially lead to fragmentation of global trade. The World Bank projects that global growth in advanced economies will slow from 5.1% in 2021 to 2.6% in 2022, while growth in emerging and developing economies is expected to fall from 6.6% in 2021 to 3 .4% in 2022. Global trade growth is expected 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%,” the report said. “Export growth is expected to slow from last year’s peak as the base effect becomes less favorable and global demand weakens. In addition, supply-side constraints, including the global shortage of semiconductors, 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.

Bearish Outlook
Chinese exports rose 16.9% year-on-year in May, official statistics showed, as factories restarted and logistical bottlenecks eased after authorities eased some Covid restrictions in Shanghai. This is the fastest growth since January 2022. Imports also increased (3.9%) for the first time in three months.

Last month, Fitch Ratings cut its forecast for China’s GDP growth for 2022 to 4.3%, from 4.8%, and revised its growth forecast for 2023 slightly upwards, to 5.2%, from 5.1%, assuming the government will phase out its ‘dynamic zero’. Covid’ policy only gradually over the next year.

The World Bank stresses that while China has the macroeconomic capacity to weather slowing growth, the challenge is how to make any policy stimulus effective as lockdowns persist.

Moreover, China has traditionally favored stimulating growth through debt-financed infrastructure and real estate investments, a growth model that the World Bank describes as “ultimately unsustainable”. Instead, he proposes that policymakers transfer more of the stimulus to the central government balance sheet and direct public investment towards greening public infrastructure.

“High levels of corporate and local government debt limit the effectiveness of policy easing and store other risks over time,” said Ibrahim Chowdhury, the World Bank’s senior China economist.
Source: Baltic Stock Exchange

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