China’s GDP data for Q4 2022 (2.9% y/y) and full year 2022 (3% y/y) beat consensus and have been met with deep skepticism among economists. It is indeed hard to see how growth was flat on a QOQ basis in Q4 as Covid swept the country, exports slid and the property downturn worsened. Several commentators have also pointed out seeming contradictions between the GDP data and the monthly activity data from November and December.
The other reason to downplay the GDP release is that it says relatively little about what China’s post-Covid recovery will look like. Data will be noisy through January and February as the Covid wave runs its course and the lunar new year holiday (officially starts Jan 22) adds a seasonal distortion. There will be plenty of incremental data but it may not be until March that the post-Covid trajectory starts to become more clear.
In terms of policy implications, the GDP release means that Beijing is indicating (or claiming) that the economy is in better shape than expected. On the margin, that points to a lower likelihood of additional stimulus in the near-term. Our outlook for 2023 noted that Beijing is banking on a reopening and hoped for boost in confidence – rather than aggressive stimulus – to power the recovery this year (our Friday update also elaborated these themes). This sets up the potential for disappointment if the consumption rebound is less robust than many observers expect.
The importance of confidence is one reason that China’s demographic data for 2022 is deservedly front-page news today. The population in 2022 declined for the first time since 1960, which is one year earlier than projected by the UN this past summer. Births in 2022 fell below 10 million for the first time, for the smallest increase since at least 1950.
Our outlook piece made two related points on this theme. First, it is important to acknowledge that China’s Covid recovery comes in the face of a broader structural slowdown. Second, while demographic trends play out over the long-term, they are already impacting China’s current outlook in several ways:
- Falling births, and the implications for slowing household formation, are part of the story behind subdued property demand. They are also one reason why Beijing, despite scaling up support to prevent a further deterioration in real estate this year, will remain reluctant to go back to a model of speculative demand and high leverage, given the systemic risks this poses for the financial system and economy as fundamental demand for housing slows. The goal is a soft landing for property investment, not a U-shaped rebound.
- The aging population and associated burdens on the social safety net are a key reason why the central government, wary of contingent liabilities to come (such as from underfunded local pensions), is reluctant to do more aggressive fiscal stimulus – including cash payments to households or other means of directly supporting consumption this year.
- Less quantifiably, the demographic outlook is shaping the broader economic and social narrative within China. Low fertility rates impact economic growth but are also seen to some extent as a barometer for expectations, reflecting households’ concern over their future income and the ability to afford childcare and education. This is not positive for animal spirits.
China’s leadership is increasingly focused on the demographic challenge and will likely roll out more plans and policies, but there are major limits to what can be done. Japan and South Korea show how difficult it is for policy to reverse falling fertility rates, and there is a huge amount of structural inertia behind demographic trends (that is, lower births today mean fewer women of child-bearing age in the future and thus lower births to come). We’ll have more to say on demographic trends and the market implications – positive as well as negative – in future reports.
