China GDP: Economy shakes off Covid legacy to grow 4.5% in Q1

Hong Kong
CNN
—

Chinese economy 2023 is off to a strong start as consumers begin spending heavily after three years of strict pandemic restrictions end.

In the first quarter, gross domestic product rose 4.5% from a year earlier, according to the State Department. National Bureau of Statistics on Tuesday. That beat the 4% economic growth estimate in a Reuters poll of economists.

But private investment has barely budged, and youth unemployment has risen to the second-highest level on record, indicating that the country's private sector employers remain wary O long term prospects.

Consumption showed the strongest rebound. Retail sales jumped 10.6% in March from a year earlier, the highest level of growth since June 2021. From January to March, retail sales grew 5.8%, driven primarily by higher food service revenues.

“The combination of a strong rise in consumer confidence, as well as a still incomplete release from pent-up demand, tells us that the consumer-led recovery still has room to grow,” said Louise Loo, lead China economist at Oxford Economics.

Industrial production also showed steady growth. It rose 3.9% in March, up from 2.4% in the January-February period. (China typically combines its economic data for January and February to account for the impact of the Lunar New Year.)

Last year, GDP increased by only 3%, falling far short of the official growth target of “around 5.5%” as Beijing's approach to stamping out the coronavirus has crippled supply chains and hit consumer spending.

After massive street protests swept the country and local governments ran out of cash to pay huge Covid bills, authorities finally abandoned their zero-Covid policy in December. After a short period of recession caused by the rise of Covid, the economy has begun to show signs of recovery.

Last month, an official measure of non-manufacturing activity jumped to its highest level in more than a decade, suggesting the country's crucial services sector has benefited from a resumption of consumer spending as pandemic restrictions end.

As the economic recovery gains momentum, investment banks and international organizations have raised their growth forecasts for China this year. In its World Economic Outlook report released last week, the International Monetary Fund said China is “recovering strongly” as its economy reopens. The country's GDP is forecast to grow 5.2% this year and 5.1% in 2024.

However, some analysts believe the strong growth recorded in the first quarter was the result of a “backlog” of economic activity from the fourth quarter of 2022, which was weighed down by pandemic restrictions and then a chaotic reopening.

“Our core view is that China's economy is in a deflationary state,” Raymond Yeung, chief economist for Greater China at ANZ Research, said in a research note on Tuesday.

If adjustments were made for the impact of the delay in economic activity, GDP growth in the first quarter could have been as low as 2.6%, he said.

Some key data released Tuesday supports that idea. For example, private investment has been extremely weak.

Private sector fixed investment increased by just 0.6% from January to March, indicating a lack of confidence among entrepreneurs. (Meanwhile, government investment increased by 10%). This is even worse than the 0.8% growth recorded between January and February.

The Chinese government has resorted to amazing measures restore confidence among private entrepreneurs, but the campaign caused more nervousness than optimism.

The all-important real estate industry is also mired in a deep recession. Property investment fell 5.8% in the first quarter. Real estate sales by area decreased by 1.8%.

“The domestic economy is recovering well, but the limitations of insufficient demand are still evident,” Fu Linghui, an NBS spokesman, said at a news conference in Beijing on Tuesday. “Industrial product prices continue to fall and businesses face many challenges to profitability.”

Unemployment continues to rise among young people.

The unemployment rate among youth ages 16 to 24 reached 19.6% in March, rising for the third month in a row. This was the second-highest figure ever, behind only the 19.9% ​​level achieved in July 2022.

High youth unemployment suggests “weakness in the economy,” Jung said.

“By June, there will be a new batch of graduates looking for work. The unemployment situation could worsen further if China's economic momentum weakens,” he added.

China's Ministry of Education previously estimated that a record 11.6 million college graduates will be looking for work this year.

At last month's meeting of the National People's Congress, the country's formal parliament, the government set a cautious growth plan for this year, with a GDP target of about 5% and the creation of 12 million jobs.