As China abandons zero-Covid, what will the economy look like in 2023?

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As China moves closer and closer to fully re-emerging from three years of government-imposed Covid isolation and reintegrating with the world, economic expectations are high.

Beijing’s recent pivot from its strict zero Covid strategy – which had long stifled business – should inject vitality into the world’s second-largest economy next year.

Covid shutdowns and border curbs have left China out of sync with the rest of the world, disrupting supply chains and damaging the flow of trade and investment.

And with the global economy now facing significant challenges, including energy shortages, slowing growth and high inflation, China’s reopening could provide a much-needed and welcome boost.

But the reopening process is likely to be erratic and painful, economists say, with the country’s economy in a bumpy phase in the first months of 2023.

China’s historic real estate slowdown and a possible global recession could also cause more headaches in the new year, they added.

A woman crosses a street on the Bund in Shanghai's Huangpu district on December 21, 2022.

“In the short term, I think China’s economy is likely to experience chaos rather than progress for one simple reason: China is ill-prepared to deal with Covid,” said Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, a Boston-based investment company.

For nearly three years, China has stuck to its zero-tolerance approach to the virus, even as the policy has caused unprecedented economic damage and widespread frustration. In 2022, growth has slowed sharply, corporate profits have collapsed and youth unemployment has reached record highs.

Amid growing public unrest and financial pressure, the government abruptly changed course this month, effectively abandoning zero-Covid.

While the easing of restrictions is a long-awaited relief for many, its abruptness caught unprepared audiences off guard and left them largely to fend for themselves.

Few customers are seen at a shopping mall in Suqian, Jiangsu province, China, December 26, 2022.

“In the initial phase, I think the reopening could trigger a wave of Covid cases that could overwhelm the healthcare system, dampening consumption and production in the process,” Zhuang said.

Already, the rapid spread of the infection has pushed many people indoors and emptied shops and restaurants. Factories and businesses have also been forced to close or reduce production as more and more workers fall ill.

People line up to receive free fever-reducing ibuprofen tablets at the flagship store of a national pharmacy chain in Hangzhou, east China's Zhejiang province, Dec 28, 2022.

“Living with Covid will be harder than many realize,” analysts at Capital Economics said.

They expect the Chinese economy to contract by 0.8% in the first quarter of 2023, before rebounding in the second quarter.

Other experts also expect the economy to recover after March. In a recent research report, HSBC economists predicted a contraction of 0.5% in the first quarter, but an overall growth of 5% for 2023.

China’s anarchic reopening isn’t the only factor weighing on the economy. In 2023, experts will continue to watch how policymakers try to fix the country’s ailing real estate sector, which accounts for nearly 30% of its GDP.

The sector crisis – which began in late 2021 when several top developers defaulted on their debt – has delayed or halted the construction of pre-sold homes across the country. This sparked a rare protest this year from homebuyers, who refused to pay mortgages on unfinished homes.

While Beijing has made a series of attempts to save the sector – including unveiling a 16-point plan last month to ease the credit crunch – the statistics still paint a grim picture.

Property sales in value fell by more than 26% in the first 11 months of this year. Investment in the sector fell by 9.8%.

At a key policy meeting earlier this month, top leaders pledged to focus on reviving the economy next year, suggesting they would roll out new measures that would improve the financial situation of the real estate sector and would boost market confidence.

“The measures announced so far are not sufficient to cause a reversal, but policymakers have signaled that further support is on the way,” analysts at Capital Economics said.

“That should reassure buyers enough to increase sales perhaps before the middle of next year.”

A potential global recession is another major concern that will shape China’s economic landscape in 2023.

Trade had fueled much of China’s economic growth earlier this year, as exports were boosted by rising prices for the country’s goods and a weaker currency.

But in recent months the commerce sector – which accounts for around a fifth of China’s GDP and provides 180 million jobs – has started to show cracks due to a global economic slowdown.

Last month, China’s outbound shipments contracted 8.7% from a year earlier, much worse than October’s 0.3% drop. It’s the worst performance since February 2020, when China’s economy nearly came to a standstill amid the initial coronavirus outbreak.

Countries around the world are facing recession as policymakers continue to raise interest rates to combat soaring inflation.

“[China’s] exports have already reversed much of their pandemic-era boom,” Capital Economics analysts said.

“But a looming global recession means they will likely have to fall further over the next few quarters.”

Author: niso

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