China: Reopening to support global growth

Throughout much of 2022, analysts and commentators posited that the key variable for global growth and markets in the coming quarters would be when China would follow the rest of the world in easing off on its restrictive Covid-19 controls, and how rapidly it would do so. In the end, the most severe restrictions were not eased until near the end of the year in the wake of sizeable protests. Now quarantine camps are no longer necessary for close contacts, lateral flow tests have replaced PCR test requirements, and lockdowns will be far more micro-targeted. From January 8, travellers to China will no longer need to quarantine, while international travel for Chinese citizens is due to be ‘resumed in an orderly manner.’

China real GDP growth, % y/y

Source: Bloomberg, Emirates NBD Research

The situation is more nuanced than the reopening simply giving an immediate shot in the arm to the global economy and will likely remain difficult through the start of the year at least. Nevertheless, the consensus view is that China’s GDP growth will accelerate from an estimated 3.0% last year to 4.8% in 2023. As the world’s second-largest economy this will provide a fillip to the rest of the world as well, but the direct boost to individual countries will not be akin to what we have seen in the recent past.

Rising case numbers will hold back Q1 growth

In the near term, the rapid loosening of the onerous restrictions that were in place for some three years has reportedly prompted a large uptick in Covid-19 cases in China. Covid-19 vaccination rates are reportedly lower for people aged over 80 than for the population as a whole, with only 40% of those over 80 years old having received a booster. While it seems likely that case numbers will continue to rise in the coming weeks and months, there are signs that cases may have peaked in some cities. However, the spread of the virus through the country will be exacerbated by travel around the upcoming lunar new year holiday, posing a drag on activity in the first quarter at least and likely into the start of Q2 also.

China PMI surveys

Source: Bloomberg, Emirates NBD Research

China’s PMI surveys, key timely indicators, have already been showing the strain recently of the high case numbers and related restrictions. While the easing of the restrictions should provide a boost to many of the survey respondents’ businesses down the line – especially in the services sector – for the time being they will remain under pressure. Indeed, the December manufacturing PMI print deteriorated to 47.0, from 48.0 in November when the restrictions were still in full force, while services fell to 41.6, the lowest level since February 2020 when China was previously worst affected by the virus. The contraction in manufacturing, in large part driven by staff shortages as people come down with Covid, has implications for the global economy through its impact on supply chains, although this is expected to be comparatively short lived, and the move by global consumers to a focus on experiences over things in their spending post the pandemic will likely reduce its inflationary impact compared to the chips and ships issues seen in 2020/21.

Growth should pick up through the second half

Once this wave of Covid-19 cases eases and the domestic situation in China normalises, then there is potential for Chinese growth to accelerate and help pull the rest of the world out of an anticipated recession. Consensus projections have q/q real GDP growth in China strengthening from 0.8% in Q1 to 1.2% in Q2 and 1.7% in Q3. This will boost the global growth outlook in and of itself, but Chinese demand should also help support recoveries in other countries as well, notably commodity exporters: finance minister Liu Kun has in January repeated the government’s pledge to step up fiscal spending, including through infrastructure projects. However, it would be imprudent to anticipate that the authorities will unleash stimulus to the scale seen in 2008, when Chinese demand bolstered the recovery from the GFC and led to strong growth in key exporters such as Brazil and Australia. The PBOC reiterated on January 5 that it will implement targeted and ‘forceful’ monetary policy in order to support the economy through the coming months, but the massive infrastructure-led stimulus of 2008 is unlikely to be repeated in a much-changed environment where the authorities are wary of an over leveraged property sector.

Chinese reopening supportive of commodity prices

The Chinese reopening has given a fillip to some commodity prices, and metal prices rose through the close of 2022. However, with the rest of the world facing a downturn, the environment for industrial metals this year is far from sanguine. The other key commodity over which there is a sizeable question mark is to what degree will Chinese demand for oil will offset the recessionary environment in some other key economies. At present, the spread of Covid-19 has dampened any optimism, and oil prices are down around 7% since the start of the year.

Looking ahead, however, Chinese demand returning to near pre-pandemic levels would represent a substantial tightening dynamic in oil markets as growth in supply this year will be limited given OPEC+ production capacity and sanctions on Russia. This informs our forecast for an average Brent futures price of USD 105/b compared with USD 99/b in 2022. GCC economies will be key beneficiaries of a recovery in Chinese oil demand, both through direct exports to China but also through the persistent higher oil price environment which will continue to buttress fiscal surpluses. For oil importers the effect will be less positive as while oil-driven inflation will not be to the same degree as seen in 2022, nor will it turn deflationary either.

Brent futures, USD/b

Source: Bloomberg, Emirates NBD Research

The rise in China’s oil demand will be driven by travel both domestically and eventually international also. Google mobility data is not available for China, but the easing of restrictions is set to unleash substantial pent-up demand for travel in the coming months, kicking off with the upcoming lunar new year holidays. Chinese travel agency Qunar has reported a surge in online searches and bookings, and while some countries have been imposing restrictions on Chinese travelers over Covid-19 concerns, once the situation normalises it will provide a boost to global tourism centres, not least Dubai. The full recovery of the emirate’s tourism sector has been held back to now by the restrictions on Chinese travel – Chinese tourists used to be one of the top five source markets for visitors to Dubai – but with these now easing, numbers could return to pre-pandemic levels in 2023, notwithstanding the economic pressures on other key source markets.