China’s economy responded to the end of widespread COVID-19 lockdowns with a spurt of growth in the first quarter of 2023, surprising analysts with a GDP increase of 4.5% over the same time period in 2022 and raising questions about its direction for the remainder of the year.
Decisions taken by the Communist Party leadership, and particularly President Xi Jinping, to pursue a “zero-COVID” policy for much of the pandemic had sharply restricted growth in 2022, as whole cities were shut down in an unsuccessful effort to prevent the disease from spreading through the population.
Abandonment of that policy late last year set the stage for an economic recovery, but until now it was unclear precisely what shape it would take and what would drive it.
Tuesday’s announcement by the National Bureau of Statistics showed that the main driver of growth in the first quarter was a surge in consumer spending, which propelled retail sales 10.6% higher in March than they had been a year previously.
The surge in consumer spending was strong enough to drown out some signals of weakness in the Chinese economy, including in the areas of housing, infrastructure and industrial output.
What remains unclear at this point is whether the growth demonstrated in the first three months of the year has momentum or represents a one-time surge in consumption related to the lifting of lockdowns.
Driven by retail
Economists had been predicting strong growth in the first quarter, but the 4.5% figure on Tuesday significantly improved upon the consensus forecast of 4.0% growth.
The National Bureau of Statistics said the growth was achieved even though China was “faced with [a] grave and complex international environment as well as arduous tasks to advance reform, development and ensure stability at home.”
Retail spending surged across the country, with both urban and rural areas experiencing a boost in consumer purchases. In a sign that people are going out more, spending on restaurants in the month of March was up 26% over the previous year.
Targeted subsidies
Superficially, the story of China’s recovery seems similar to other countries, where consumers came out of the pandemic with money saved and a desire to engage in “revenge spending” — treating themselves to things that they had been denied during the pandemic.
However, Lauren Gloudeman, a director for China with the Eurasia Group, told VOA that while the report is clearly good news for the Chinese economy, it is important to recognize the difference in approaches to the pandemic between China and other countries.
Chinese consumers are not sitting on piles of economic stimulus funds, like many Americans were last year, because the government did not make the same kind of broad effort to stimulate economic activity during the pandemic. The explanation of increased consumer spending is more complicated.
“We do have some information on what actual goods are driving the strength there,” Gloudeman said. “It really has been purchases of automobiles that have been a primary driver of the consumer goods spending story. Much of that is targeted subsidies by the government. Part of the government's policy for boosting consumption this year is helping to subsidize auto sales, because that's one of the biggest contributors to overall retail sales growth.”
“To me that says this isn't a sustainable growth story,” she said. “This is more or less direct policy support that's going to be short-lived. It's going to expire eventually.”
At the same time, though, Gloudeman said that strong spending on basic consumer items is definitely a positive sign for China.
Mixed reviews
China’s surge in consumer spending helped to mask some more ambivalent signals in the report. For example, industrial production grew relatively slowly, advancing by only 3% year over year, and by just 0.3% compared to the fourth quarter of 2022.
China’s long-struggling real estate sector continued to lag in the first quarter, with overall investment in development declining by 5.8% year over year. Sales of commercial real estate also fell by 1.8%. Investment in fixed assets and in infrastructure both grew, but at a slower pace than last year.
However, other areas saw marked increases in investment, including in the tech sector, where investment in manufacturing rose 15.2% and investment in services jumped by 17.8%.
Caution about numbers
Not all analysts were willing to take the Chinese government’s numbers at face value. In a note sent to clients on Tuesday morning, New York-Based Rhodium Group noted that late revisions to the data for the fourth quarter of 2022 made the first quarter growth look larger than it would otherwise have been.
“[I]t’s prudent to look beyond the headline figure into more granular data and what it can tell us,” the note said. “Household consumption indicators are pointing to a modest recovery in 2023, rather than runaway revenge spending.”
China reported growth in net exports during the quarter, but Rhodium’s analysis said it was unclear whether that will continue. “One might be skeptical of continued growth there though — developed markets are still under pressure and other export-driven economies in Asia are reporting slower export growth in 2023.”
On the question of whether the growth reported in the first quarter is sustainable, the Rhodium note advised, “First, keep in mind that revisions to previous data helped boost the topline number for this quarter. And then consider that household consumption is likely going to be one of the most important factors in determining the year’s GDP growth.
“We’re looking at potential deflationary pressure in China and consumers are saving more, so the path to continued growth like this seems fraught.”
