Notwithstanding the Chinese CDC’s prediction that by the end of the first quarter of 2023, China will be coming out of three successive waves of Covid-19 infections and with economic activity returning to normal, we have already seen that investment is not likely to contribute to China’s GDP growth in 2023 as it did in the pre-pandemic years. Are there reasons for optimistic forecasts regarding the evolution of the Chinese economy when other variables are taken into consideration? In this article, we will analyze the matter in terms of consumption and domestic demand.
Domestic demand stemming from household spending was severely constricted in 2022 due to blockades and travel restrictions. There are expectations of a recovery in consumption in 2023, a corollary to an increase in post-zero-covid demand. However, there are several reasons to be wary of an increase in consumer demand in 2023.
Household savings are at record levels, with a lot of money being placed in term deposits with maturities of 3 to 5 years, the early withdrawal of which is costly. Unemployment rates among workers aged 16 to 24, which hit 20% at the beginning of 2022, remained at 17% at the end of the year.
The slowdown in the global economy is likely to affect employment in China’s export sector. In China’s real estate sector, stagnation stemming from the ongoing readjustment is likely to continue, damaging employment prospects in construction and related sectors and affecting disposable income. Secondary market prices for residential properties continue to fall in Tier 2 and Tier 3 cities. Plummeting home values weigh significantly on consumers’ propensity to spend because a substantial portion of household wealth is invested in real estate.
An increase in consumer spending in 2023 would probably require some sort of consumer stimulus package, but Beijing has few instruments at its disposal to do this. Individual income taxes are already very low, around 1% of GDP.
Tax breaks for cars and subsidies for some purchases of durable goods are already in place. New consumer voucher programs are possible, with more widespread deployment, taking advantage of ubiquitous digital payment platforms such as WeChat. While growth in household consumption to pre-pandemic levels means an approximately +2% contribution to GDP growth in 2023, the most likely outcome is a range between pre-pandemic and 2022 levels, with a contribution of only around +1%.
China’s public spending is constrained by the same factors that are undermining investment in infrastructure: weak provincial government revenues from taxes, fees, and land sales. While a return to a pre-pandemic “normal” would mean a public expenditure contribution of around +1% to GDP growth in 2023, the more likely outcome is a continued limited growth in public expenditure observed in 2022, resulting in a contribution of approximately +0.5% at best.
In other words, China’s economic growth prospects for 2023 do not look very promising either as concerns domestic demand.