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China records one of its worst economic performances in decades due to Covid

China’s economy grew 3% in 2022, far below the government’s own target, marking one of the worst performances in nearly half a century. Growth was heavily impacted by months of widespread Covid-19 lockdowns and a historic downturn in the property market.

Even so, the number came in a little better than market expectations, with some signs of stabilization in the last weeks of 2022 due to policies to support investments in infrastructure and credit expansion.

The Gross Domestic Product (GDP) increased by 2.9% in the fourth quarter, according to an announcement by China’s National Bureau of Statistics this Tuesday (17). A Reuters poll of economists had previously estimated an expansion of just 1.8% for the fourth quarter and 2.8% for 2022.

“China’s domestic economy has suffered unexpected shocks in 2022, including frequent Covid outbreaks and extreme heatwaves,” Kang Yi, director of the NBS, told a press conference in Beijing.

“The triple pressures of contracting demand, supply shocks and weakening expectations continue to evolve, and the complexity, severity and uncertainty of the environment is increasing.”

China has taken a zero-tolerance approach to the coronavirus since the start of the pandemic. But three years of restrictions have wreaked havoc on the economy, angered the public and put an extraordinary strain on local government finances.

Amid mounting pressure, the government abruptly changed course in early December, effectively ending its controversial Covid-0 policy.

However, while the easing of restrictions was a relief to many, their abruptness caught the public off guard, leaving people largely to fend for themselves.

The rapid spread of the infection drove many people indoors and emptied stores and restaurants. Factories and businesses were also forced to close or cut production as more workers fell ill.

“Fourth quarter data surprised on the upside against depressed expectations. But be that as it may, the data still confirms a dismal end to a challenging year for the Chinese economy,” said Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers.

The worst has gone?

Tuesday’s data offered a glimpse into how the Covid outbreak has disrupted the economy over the past month. Retail sales dropped 1.8% in December, falling for the third straight month.

The contraction was mainly caused by the spread of Covid, as “most people were infected and stayed at home,” said Chaoping Zhu, global market strategist at JP Morgan Asset Management.

Year-to-date, retail sales fell 0.2%, while they had registered growth of 12.5% ​​in 2021.

Meanwhile, industrial production growth slowed to 1.3% in December, the weakest in seven months. For 2022, it rose 3.6%, compared to 9.6% in 2021.
But there are some positives.

Investment in fixed assets increased by 5.1% in the period from January to December. Investment in basic infrastructure – which includes railroads, ports and telecommunications networks – jumped 9.4% in the whole of last year. Investment in the manufacture of electrical machinery and equipment grew by 42.6% in the same period.

The growth came thanks to the government’s infrastructure investment push and monetary easing efforts, analysts said.

“The good news is that there are now signs of stabilization, as the policy support distributed towards the end of 2022 is showing in the relative resilience of infrastructure investment and credit growth,” said Louise Loo, senior economist at Capital Economics, in note.

Consumer spending is still lagging, but overall economic growth is expected to pick up more strongly from March onwards, she adds.

“The fourth quarter probably marked the darkest before dawn,” Yao said. “It is possible that part of the surprise in the December data reflected the drop in economic activity in cities that have already passed the mid-month peak of infections.”

Policy support

Policymakers recently pledged to do everything to save the economy in 2023, banking on the private sector to boost growth.

They eased pressure on the troubled technology and property sectors, which have been reeling from a broad regulatory crackdown on private enterprise since 2020.

The moves boosted investor and analyst confidence about a significant recovery in China’s economy.

So far, a group of government economists and international analysts have raised their growth forecasts for China to between 4.3% and 5.4% in 2023. Some expect Beijing to set a growth target above 5%.

Ongoing Risks

But the country still has many challenges ahead.

“Risks persist in real estate and local government debt,” Zhu said.

He expects a further interest rate cut in the first quarter, followed by further monetary easing measures from the central bank.

“China’s year 2023 will be a bumpy one; not only will it have to face the threat of new waves of Covid, but the worsening of the country’s residential real estate market and the weak global demand for its exports will be stopped”, said Harry Murphy Cruise, economist at Moody’s Analytics.

The statistics bureau also revealed that China’s population has dropped. The country had 1.4118 billion people in 2022, down about 850,000 people from 2021. Analysts said the decline was the first since 1961.

“China cannot rely on the demographic dividend as a structural engine for economic growth. Moving demographics will be a headwind,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management.

“Economic growth will have to rely more on productivity growth, which is driven by government policy.”

Source: CNN Brasil

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