China’s economy grows by 4.5% in the first quarter of 2023, defying Covid-19 impact

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Hong Kong

China’s economy started the year 2023 on a strong note, with consumers splurging after the lifting of three years of strict pandemic restrictions.

The National Bureau of Statistics revealed that the Gross Domestic Product (GDP) grew by 4.5% in the first quarter compared to a year earlier, outperforming the 4% growth estimated by economists in a Reuters poll.

While private investment remained stagnant and youth unemployment spiked to record levels, the surge in consumption was notable. Retail sales soared by 10.6% in March and grew by 5.8% in the first three months of the year, primarily boosted by increased revenue from the catering industry.

Louise Loo, China lead economist at Oxford Economics, stated, “The combination of a steady uptick in consumer confidence as well as the still-incomplete release of pent-up demand suggest to us that the consumer-led recovery still has room to run.”

The industrial production sector also witnessed growth, with a rise of 3.9% in March compared to 2.4% in the January-to-February period, which traditionally combines these months to adjust for the Lunar New Year holiday impact.

Commuters during Beijing's morning rush hour in April 2023

In contrast to the previous year’s GDP growth of just 3%, missing the target of “around 5.5%,” the economy has rebounded following the abandonment of the zero-Covid policy in December, leading to signs of recovery.

The recent surge in services sector activity indicates a revival in consumer spending post the pandemic restrictions easing.

Investment banks and international organizations have revised China’s growth forecasts upwards. The International Monetary Fund predicts a growth rate of 5.2% for 2023 and 5.1% for 2024 in its latest World Economic Outlook.

However, some analysts caution that the strong first-quarter growth might be attributed to economic activity postponed from the previous quarter, affected by pandemic restrictions and a turbulent reopening phase in 2022.

Chief economist for Greater China at ANZ Research, Raymond Yeung, stated, “Our core view is that China’s economy is deflationary,” in a recent research report.

Further adjustments may be needed to factor in the impact of delayed economic activities on the growth metrics.According to the official, the GDP growth in the first quarter may have been as low as 2.6%.

Some data released recently supports this claim. For instance, private investment showed significant weakness.

Private sector fixed asset investment only grew by 0.6% from January to March, indicating a lack of confidence among business owners. In comparison, state-led investment increased by 10%. This growth is worse than the 0.8% recorded in the previous two-month period.

To boost confidence among private entrepreneurs, the Chinese government has taken surprising measures, but these actions have led to more anxiety than optimism.

The property sector, a crucial industry, is facing a deep downturn. Property investment dropped by 5.8% in the first quarter, and property sales by floor area decreased by 1.8%.

Fu Linghui, a spokesperson for the NBS, noted during a news conference that while the domestic economy is recovering well, there are still clear signs of insufficient demand. Prices of industrial products are still declining, and businesses are grappling with profitability challenges.

Youth unemployment rates continued to rise. In March, the jobless rate for 16 to 24-year-olds peaked at 19.6%, marking the third consecutive monthly increase. This level is the second-highest on record, behind only the 19.9% rate recorded in July 2022.

The high youth unemployment rate indicates economic slack, according to Yeung.

He also noted that with a new wave of graduates entering the job market in June, the unemployment situation could worsen if China’s economic growth stagnates.

The Ministry of Education in China has projected that a record 11.6 million college graduates will be seeking employment this year.

During the recent National People’s Congress meeting, China’s government outlined a cautious growth strategy for the year ahead. The plan includes targeting a GDP growth of about 5% and creating 12 million new jobs.

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