It is widely expected that the global economy will grow at only a moderate rate in 2023, with inflationary pressures easing and the effects of monetary policy in major economies diminished.
In the first three quarters of 2022, the “troika” — consumption, investment and exports — contributed a respective 41.3 percent, 26.7 percent and 32.0 percent to China’s GDP growth. As world economic growth decelerates, external demand will provide significantly less tailwind for China’s economic growth. The negative growth of China’s foreign trade imports and exports in the last two months has borne this out.
The latest data show that November’s global manufacturing PMI has been declining for six consecutive months and hovered below the 50 percent threshold for two consecutive months, indicating a lack of growth momentum worldwide. In November, U.S. inflationary pressure continued to recede, leading to a more dovish rate hike in December by the Federal Reserve, which announced a 50 basis point rate increase. It is widely expected the Fed will continue with moderate rate hikes in 2023, with a 25 basis point hike priced in at any particular time, before withdrawing from rate hikes outright in June.
For Europe, inflation continues to run at an elevated level, and the economy seems bound to fall into recession next year. China-U.S. trade and China-EU trade contributed more than 80 percent to China’s trade surplus. As outbound tourism resumes in 2023, China’s services trade deficit will widen significantly. All this dictates that Chinese policymakers need to turn to domestic demand as a growth driver.
Without doubt the Chinese economy will get back on track over time in 2023. Recently, the Chinese government calibrated its COVID response policies. Despite the short-term blow, or initial shock wave, China’s economy is expected to rebound in the second quarter, with GDP growth at around 4.7 percent for the year and 5.0 percent in 2024.
In the new year, imported inflationary pressure will subside in China and prices will remain stable, with CPI at around 3 percent and PPI trending higher from a low basis to 4 percent throughout the year. The employment situation will improve significantly. One reason is that the economy is reopening and demand for labor is rising. The other is that the baby boomers born in the early 1960s are retiring, leaving large numbers of jobs open. The yuan will continue to fluctuate against the U.S. dollar, but basic equilibrium will be maintained in the balance of payments.
The Central Economic Work Conference prioritizes the expansion of domestic demand. Therefore, investment in fixed asset will expand faster in 2023 and can be expected to grow by more than 8 percent for the year. In the real estate sector, investment will move from negative to positive territory as the confidence of private and foreign investors rises, contributing to faster growth in high-tech industries and social sectors.
The investment structure will be significantly optimized. In 2023, odds are that the real estate sector will pick up steam over time, but the recovery will be range-bound. Consumption will gain momentum, especially from the second quarter onward, with a strong recovery in domestic tourism that will spur the growth of transportation, entertainment and catering services. China’s stock market will gain traction as well.
In 2023, China will continue to uphold the economic policy of pursuing progress while maintaining stability. It will continue to implement a proactive fiscal policy and a prudent monetary policy, while strengthening policy coordination.
• First, proactive fiscal policy will be more effective and targeted and will maintain sufficient intensity of fiscal spending; optimize the mix of deficits, special bonds, interest subsidies and other tools; and increase transfer payments to local governments.
• Second, a prudent monetary policy will be more targeted. China will maintain reasonable growth of M2 and guide financial institutions to increase support for small and micro enterprises, scientific and technological innovation, green development and other fields. It will maintain the basic stability of the RMB exchange rate.
• Third, China will strengthen the transformation and upgrading of traditional industries, cultivate strategic emerging industries, shore up weak links in the industrial chain and continue to implement its carbon peak/carbon neutral target tasks.
• Fourth, science and technology policies should focus on self-reliance and excellence.
• Fifth, social policies will aim to secure people’s livelihoods. China will continue to implement the employment first policy, including the employment of young people, especially college graduates.
The central government emphasizes stability in growth, employment and prices. The emphasis has shifted from stability on six fronts to only three, which clarifies the goal, and makes the focus more prominent. The government also stresses that spurring domestic demand and consumption will be a priority.
We have to bear in mind that while investment expansion will deliver results quickly, policies to boost consumption take time to bear fruit. The key is to increase the incomes of urban and rural residents. In my opinion, the right course is to do everything possible to expand employment and shore up small and medium-sized enterprises and household entrepreneurs. It is imperative to create an enabling business environment for the 160 million market players.
In addition, it is imperative to improve the income distribution and social security systems. Residents’ spending on daily necessities, food, housing and transportation — especially for housing and cars — account for almost 50 percent of household budgets. Therefore, policies should lean toward better housing and new-energy vehicles.
Also, with the accelerated advent of an aging society, the demand for elderly services is rising.
In addition, government investment and policy incentives will effectively draw in private investment, encouraging and attracting more private capital to the construction of major national projects and addressing weak links. The expansion of government investment will catalyze private investment and foreign investment, rallying all available resources to boost the country’s economic growth.
All in all, we should keep our fingers crossed for what is in store for China’s return to economic boom times in 2023.