China’s economic growth is expected to increase to 5 percent in the current year, following the lifting of COVID-19 restrictions and the recovery of household demand, according to the Asian Development Outlook (ADO) April 2023, released by the Asian Development Bank (ADB). Consumer demand is expected to pick up after the lifting of COVID-19 restrictions at the end of 2022. However, the recovery may take time, given the reluctance of households to spend over the past 3 years amid pandemic-related uncertainty. “Fiscal spending, like infrastructure investment, will continue to be needed in the short run to catalyze economic recovery, in particular since external demand may ease in 2023 as growth in advanced economies cools,” ADB Country Director for China, Safdar Parvez told media on April 04, 2023.Consumer price inflation is expected to stay subdued in 2023 and 2024 as pass-through from higher producer prices has become less likely. Service prices may pick up, driven by higher household demand. Inflation was forecast at 2.2 percent in 2023 before easing to 2.0 percent in 2024, in line with slower economic growth, the report said. External trade was expected to moderate, and capital flows may be more balanced in 2023. As demand from advanced economies softens, exports would likely decline, though from a high base. Weaker exports of consumer and investment goods should restrain merchandise imports, while trade in services should pick up as outbound travel from China resumes, it added.The report highlighted that boosting long-term potential growth was a policy challenge, calling for structural reform to allocate capital and credit more efficiently, address adverse demographics, strengthen human capital, and raise productivity. Economic growth was trending down before the pandemic. Keys to raising potential growth include state-owned enterprise reform and increasing domestic consumption, it suggested. About risks to the outlook, the report mentioned they include the unpredictability of the COVID-19 virus as new variants could undermine recovery in domestic consumption. “Another risk is that the recovery in consumption or in the housing market turns out slower than expected. An external risk is the global economy cooling faster or deeper than expected,” it added. Head of Economics and Strategy Unit, Resident Mission, China, Akiko Terada-Hagiwara told the media that potential growth moderates as per capita income grows, even without the pandemic. She said that potential GDP growth was estimated to moderate from above 5 percent to an average of 2 percent by 2040 and recommended structural reforms to increase potential growth.Terming capital as still the biggest contributor to growth in the future, she said that reallocation of capital and credit sectors with higher returns would raise potential growth. Akiko said that the shrink in the labor force would increasingly weigh on growth and recommended delaying retirement age and higher female labor participation to meet the challenge.
Source: IBP