China braces for a slowdown that could be worse than 2020

BEIJING – Six months after China’s government set ambitious economic targets for the year, growth has slowed so sharply that several major banks don’t even think 3 per cent is achievable anymore.

Growth projections have come down steadily since March when the official target of around 5.5 per cent was first disclosed. The consensus in a Bloomberg survey is for the economy to expand 3.5 per cent this year, which would be the second-weakest annual reading in more than 4 decades. Forecasters at Morgan Stanley and Barclays are among those predicting even slower growth as risks mount into year-end.

It’s not just China’s strict Covid Zero policy of lockdowns and mass testing that’s buffeting the economy. A housing market collapse, drought, and weak demand both at home and overseas have all undercut growth.

Jian Chang, Barclays’s chief China economist, last week cut her full-year growth forecast to 2.6 per cent from 3.1 per cent, citing the “deeper and longer property contraction, intensified Covid lockdowns, and slowing external demand”. The cash crunch faced by developers will extend into 2023 and weak confidence in the real estate market and the economy will hold back any meaningful recovery in home sales, she wrote.

Here’s a look at the main risks the economy is facing and what the latest data and alternative indicators tell us about the outlook for the rest of the year.

Covid Zero policy

The biggest drag on the economy is the Covid Zero policy, which the government remains committed to despite more infectious virus strains making it harder than ever to control outbreaks. The virus has spread to every province this year and almost 865,000 people have been infected.

Major cities like Shanghai, Shenzhen and more recently Chengdu have locked down their populations and shut businesses to curb outbreaks. Frequent Covid testing is required – as often as every 48 hours in Beijing now – even in places where there are no outbreaks.

The restrictions have taken a toll on consumers, with spending taking months to recover after lockdowns. The official consumer confidence index plunged to its lowest level in nearly 10 years in April and it’s barely recovered since. Tourism has been decimated.

“The overall economic impact of Covid restrictions almost certainly worsened at the margin in August, and likely will again in September,” Ernan Cui, an analyst at Gavekal Dragonomics, wrote in a recent report. “The repeated high-profile lockdowns in major cities such as Shenzhen might remind households of the possibility of more disruptions to come, encouraging them to consume less and save more – as they have since the start of the pandemic.”

While some China watchers have speculated the Covid Zero policy may be eased after the Communist Party’s congress in October, economists at Nomura Holdings and Goldman Sachs Group say that’s unlikely. Nomura predicts the policy will remain in place until at least March next year. If it’s gradually eased from then, the economy could be in for a difficult period with people “overwhelmed by a surging Covid infection”, Lu Ting, Nomura’s chief China economist, wrote in a recent report.

Aside from the direct healthcare costs of a spike in illness and death, a widespread outbreak would also mean extended disruptions to business and consumer activity as people stay home to avoid getting infected and absenteeism from work rises.

Housing crisis