China faces bumpy recovery as economy emerges from Covid zero

China's economy proved more resilient than analysts forecast as a virus wave swept the nation, suggesting the worst of the slump may be over as a challenging recovery begins.

While gross domestic product growth of 3% last year was the second slowest pace since the 1970s, fourth quarter and December data came in better than economists had expected.

2022 was bad year for China's economy

Economists see a recovery in coming months once the current Covid wave passes, predicting growth of close to 5% in 2023. But the rebound won't be straightforward: Consumer confidence remains near record lows, the population has started shrinking for the fist time in six decades and the property market remains in the doldrums.

"The outlook for GDP growth in 2023 has improved compared to our prior outlook," said Iris Pang, chief economist for Greater China at ING Groep NV, who now sees China's economy growing 5% in 2023. "That is not to ignore the fact that China still faces considerable headwinds, including external demand, with recessions likely in the US and Europe this year."

The CSI 300 gauge of onshore stocks ended the day little changed, erasing declines of 0.5%. Hong Kong's Hang Seng Index extended its drop to as much as 1.5%.

GDP growth last year was far lower than the 8.4% recorded in 2021, when strict virus controls kept the nation largely Covid free. But the reading was higher than the median estimate of 2.7% in a Bloomberg survey of economists as growth in the fourth quarter came in at 2.9%, topping forecasts for 1.6%.

The government had initially set a growth target of around 5.5% in 2022, before Covid lockdowns and the sudden abandoning of restrictions in December put that goal out of reach. 

Activity was weak in December, though again beat economists' gloomy forecasts:

Industrial output rose 1.3% from a year ago, higher than a forecast of 0.1; Retail sales contracted 1.8% versus a predicted 9% decline; Fixed-asset investment gained 5.1% last year, largely in line with forecasts; The urban jobless rate fell to 5.5% last month from 5.7% in November; 

Policymakers have signalled they're prioritising economic growth in 2023, with a key focus on boosting consumption and investment in the country. More fiscal and monetary stimulus could be on the cards, while the government also recently took steps to ease its regulatory overhaul of the technology industry and reverse some of the restrictions on the real estate market. 

 Bloomberg's Economist Chang Shu and Eric Zhu said, "China's fourth-quarter GDP should be viewed with both concern and a degree of relief. The overshoot relative to expectations will assuage worries about a crash. The data were still very weak — there's no hiding the fact that the economy took a very heavy blow from the messy exit from Covid Zero and outbreaks that swept across the country in December. Even so, high-frequency indicators suggest that the economy may have bottomed. We see a solid rebound taking hold in 2Q23."

Tuesday's data deluge also highlighted longer-term challenges, with the population contracting in 2022 for the first time since 1961. That will have repercussions for the labor market, demand for housing and the country's pension system in coming years.

"China cannot rely on the demographic dividend as a structural driver for economic growth," said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. "Going forward, demographics will be a headwind. Economic growth will have to depend more on productivity growth."

More deaths, fewer births

Beyond the domestic challenges, China also faces risks from a slowing global economy. Demand for Chinese-made goods has plummeted in recent months, eroding a key pillar of growth.

The NBS said the recovery's foundation is "not solid yet," highlighting an international environment that remains "complex and severe." 

China's provinces are almost all targeting economic growth of 5% or more in 2023. Officials are debating a national economic growth target of around 5%, Bloomberg News reported last month.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement