China hints at pro-business policies, smaller fiscal boost

We continue to expect China’s economy to recover in 2023. Admittedly, the outlook for exports, which have been the main driver of growth for the past two years, is complex and could contract next year due to the ongoing recession. it will affect many developed market economies.

This places the burden of guiding any recovery on domestic demand, and vulnerabilities still exist in this area: the combination of the ‘zero-Covid’ policy and the collapse of activity in the real estate sector weighed on domestic production and hit consumer confidence hard.

However, there are reasons to think there will be improvement. Infrastructure spending was robust in 2022 and should continue to support growth. Meanwhile, housing indicators may have bottomed out and thus rebound in 2023. The services sector would clearly benefit from any easing of Covid restrictions that may emerge later in the year. This would help trigger the cyclical recovery that indicators have been suggesting for some time.

As a result, our baseline scenario remains that of a recovery in GDP growth, from the 3% forecast in 2022 to around 5% in 2023. This would be a slightly better result than generally expected, given the decline in expectations. The problem for markets is that, after the National Congress in October, it was politics that drove sentiment, rather than the economy. While we expect a cyclical recovery of the economy in the near term, the long-term outlook remains complex.