Macroscope | Pessimism over China’s economic recovery has gone too far
- In the past few weeks, concerns about the unevenness and durability of China’s post-Covid recovery have turned to despair
- This says more about inflated expectations at the start of the year than about the tepidness of recovery
In the past few weeks, the disappointment has turned to despair, exacerbated by signs consumer and business activity are losing momentum. Citigroup said China’s economy was “on the brink of a confidence trap”. Bank of America believes “there are growing signs that China’s economy is running out of steam”. Nomura went so far as to warn of the risk of a “downward spiral” and a “double dip”.
Even the dwindling number of bullish strategists are having to defend their predictions more forcefully. In a report published on May 28, Morgan Stanley insisted that “China’s consumption recovery isn’t done yet; don’t get off the train too early”. It admitted, however, its clients were worried that consumption “was much weaker than anticipated” and that the slowdown had become “much more visible”.
However, the pessimism over China’s recovery has gone too far. While the economy is stuttering, it is hardly cratering. The scarring from the pandemic was underestimated, as were the domestic and external constraints on Chinese growth offsetting economic weakness elsewhere in the world. Yet, this says more about inflated expectations at the beginning of this year than it does about the tepidness of China’s recovery.