People in protective suits chat in a store in Shanghai on May 26. The effect of major city lockdowns in China has left its mark on consumer confidence, which fell sharply in March. Photo: EPA-EFE
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
China could come close to its 5.5 per cent growth target this year – with planning and a bit of luck
While forecasters are downgrading China’s growth expectations for 2022, there’s scope to implement the right incentives to enable consumer demand and business investment to rally later this year
It’s vital that Beijing’s recovery efforts focus on boosting household morale
The global economy is heading into a perfect storm, buffeted by lingering Covid-19 concerns, the war in Ukraine and heightened inflation fears. These pose significant challenges for China and, judging by recent official hints, the 5.5 per cent growth target for 2022 might be beyond reach.
Consumer confidence is flagging as a result of the recent lockdowns, manufacturing activity has slipped into contractionary territory and the economy needs new policy measures to compensate. While economic forecasters are downgrading China growth expectations for 2022, it’s still early days, as there’s scope to implement the right incentives for consumer demand and business investment to rally later this year.
As the lockdowns ease and economic confidence recovers, growth will bounce back. In the aftermath of the 2020 Covid-19 crisis, China’s economy staged a major rebound and it can happen again with the right policies in place.
Premier Li Keqiang has already conceded that the economy is stalling, hinting that growth is likely to fall short of the government target. By how much it undershoots is the key issue and clearly Beijing intends to pull out all the stops to stabilise the situation.
That will mean more monetary accommodation, easier credit conditions, greater fiscal expansion and keeping the renminbi competitive for as long as possible.
If any major industrial nation has the capacity to whip up faster recovery momentum this year, China, as the world’s largest centrally planned market economy, should have the best chance of succeeding. It could come close to reaching over 5 per cent growth this year.
Beijing’s quest to contain the spread of Covid-19 infection has certainly taken its toll on the economy in recent months. The effect of major city lockdowns has left its mark on consumer confidence, which fell sharply to 113.2 in March from 120.5 in February – well down on the post-2020-crisis high of 127 in February 2021.
02:29
Shanghai finally eases lockdown rules as Covid-19 infection numbers drop
Shanghai finally eases lockdown rules as Covid-19 infection numbers drop
More weakness is in the pipeline with consumer morale also bogged down by the unsettled global backdrop, China’s rising unemployment rate and the impending squeeze on household incomes from higher inflation.
China’s jobless rate has risen sharply in recent months, from 4.9 per cent last October to 6.1 per cent in April – the highest level since the height of the Covid-19 crisis when the rate hit 6.2 per cent.
It’s no surprise that consumer optimism is struggling, especially with wealth perceptions taking an additional hit from China’s property market downturn. With investor morale under pressure, prices for new home sales are close to flat, up only 0.7 per from a year ago in April. This compares with a recent cyclical peak of 10.7 per cent in May 2019, just before the pandemic struck.
With consumer spending accounting for as much as 65 per cent of China’s economy, it’s no wonder forecasters are taking a dimmer view of the nation’s growth potential this year, with some independent outside projections for 2022 as low as 3 per cent.
Among major international forecasters, the Organisation for Economic Co-operation and Development is still expecting China’s 2022 growth to come in around 5 per cent, while the International Monetary Fund is more downbeat, forecasting 4.4 per cent.
Clearly, much work needs to be done to keep the growth objective in sight. It’s vital that Beijing’s recovery efforts focus on boosting household morale. While additional interest rate cuts shouldn’t be ruled out, there is more scope to cut the commercial banks’ reserve ratio requirement to reduce the cost of loans to borrowers and free up more cash for lending.
Beijing must ensure more tax cuts and extra government spending are available to enable a faster recovery. Fortunately, the central government has ample budgetary resources to fuel reflation, but it will mean that fiscal stabilisation and cutting the budget deficit will need to wait for a few years.
Beijing may miss its 5.5 per cent growth target this year but, with positive forward planning and a bit of luck, it should come close.
David Brown is the chief executive of New View Economics
