The economy outperformed market expectations in Q1, with annual GDP growth accelerating to 4.5% from 2.9% in Q4. The lifting of Covid-19 res...

FocusEconomics Consensus Forecast - China - May 2023

The economy outperformed market expectations in Q1, with annual GDP growth accelerating to 4.5% from 2.9% in Q4. The lifting of Covid-19 restrictions, fading virus cases and government measures to support the property sector more than offset mild external demand. Looking at sectors, a pickup in services activity drove the reading, while industrial output growth slowed slightly despite the normalization of supply chains. Moreover, the real estate market saw a partial recovery; while housing investment continued to decline, home sales rose year on year in Q1. The economy appeared to end the quarter on a strong footing, with retail sales, credit and merchandise exports readings surprising on the upside in March. The first quarter’s GDP outturn puts the government’s cautious target of around 5% growth for 2023 comfortably within reach. 
2023 GDP forecasts have been upgraded for the fourth straight publication. Economic reopening and looser housing restrictions will boost activity. However, slowdowns in developed economies and trade tensions with the West will cap momentum. A further deterioration in relations with the West and renewed regulatory pressure on domestic private-sector firms are key risks. FocusEconomics panelists expect GDP to expand 5.3% in 2023, which is up 0.2 percentage points from last month’s forecast. In 2024, the panel foresees GDP expanding 5.0%. 

Consumer inflation eased to 0.7% in March from February’s 1.0%. Producer prices fell 2.5% annually in March, following February’s 1.4% drop. Price pressures should rise later this year as domestic demand and tourism recover, although the upturn will be checked by car retailer discounts, a stronger yuan, reduced supply disruptions and milder external price pressures. Our panelists forecast that consumer inflation will average 2.3% in 2023, which is down 0.1 percentage points from last month’s estimate. In 2024, our panel sees inflation averaging 2.3%. 

New yuan loans beat market expectations in March, supported by strong growth in loans to both households and corporates. Meanwhile, the People’s Bank of China (PBOC) cut the reserve requirement ratio by 25 basis points in mid-March. The Consensus is for policy rates to be fairly stable ahead, with the ongoing economic recovery reducing the need for further easing. Panelists project the 1-Year Loan Prime Rate to end 2023 at 3.60% and 2024 at 3.60%. • The PBOC allows the yuan to trade within 2.0% of a reference rate which is updated daily. On 21 April, the yuan was down 0.1% month on month at CNY 6.89 per USD. The yuan is seen gaining ground by end-2023 thanks to China’s economic recovery and the likely end of the Fed’s tightening cycle. The rate differential between the Fed and the PBOC will be key to watch. Our panelists see the yuan ending 2023 at CNY 6.78 per USD and 2024 at 6.66 per USD.

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