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BLUE CHIP INVESTMENT | Economy Will China’s reopening benefit the global economy? We look at whether China’s recovery will boost the rest of the world by raising growth or whether it will cause inflation to come roaring back. The outlook is decisively better for China after the government’s pivot on zero-Covid policy (ZCP) late last year. Early indications from high frequency data and the January PMI surveys are that service sector activity has rebounded strongly. By contrast, the positive impact on manufacturing was capped by weak external demand while housing transactions have only muddled along after some initial improvement. Recovery in China to be driven by services This is likely to set the tone for the shape of the recovery. After all, it is China’s service sector that has really been hampered by ZCP over the past couple of years as restrictions curbed travel. “Revenge spending” on services has been observed in most economies around the world that have transitioned away from measures aimed to contain the spread of Covid, and China is likely to experience the same release of pent-up consumer demand. However, a key difference to other economies – certainly major developed markets – is that households in China do not appear to be sitting on a huge stock of savings that can be drawn down to fund a prolonged period of rampant consumption. While China’s savings rate has risen a bit, fiscal support has focused on helping the supply side of the economy rather than direct transfers to households, as was the case in the US, for example. “Sugar high” recovery likely to fade into 2024 Our baseline forecast for China now assumes three consecutive quarters of above-trend growth starting in Q1 2023 skewed towards services. We think that will lift GDP growth from our previous forecast of 5% to around 6.2% in 2023. However, the “sugar high” 40 www.bluechipdigital.co.za
INVESTMENT | Economy BLUE CHIP will probably fade as the release of pent-up demand is exhausted, savings are spent and cyclical forces turn less favourable. We think GDP growth will ease back to 4.5% in 2024. “Revenge spending” on services has been observed in most economies around the world. Source: Refinitiv, Oxford Analytica, Schroders Economics Group, as at February 2023. Based on data for 2018, except Russia and Vietnam which is based on 2017 data. Limited spill-over to other economies The positive spill-overs to other economies may be quite limited. - Small Asian economies to benefit The return of Chinese tourists will boost other parts of Asia, but these are likely to be the small Asian economies that account for only a fraction of world GDP. - European exporters may not benefit as much as in the past: Europe would usually benefit from an upturn in China’s economic cycle as stronger growth stimulates investment by manufacturers in response to an increase in demand for goods. However, we expect the recovery to be skewed towards services, not manufacturing. Furthermore, prior strong investment and soft external demand means that the recovery is unlikely to spur a renewed investment cycle in manufacturing that sucks in imports from Europe and the rest of the world. Finally, while ZCP may have delayed foreign direct investment, it is not clear if multinationals will increase investment in China at a time when geopolitical pressures are pushing for supply chain diversification. - Energy exporters could benefit Commodity exporters may receive some support if prices rise, but the playbook may be different this time. Whereas past recoveries driven by construction have buoyed the prices of industrial metals, benefiting exporters in the likes of Latin America and Africa, a recovery in services may be more supportive of energy. This could fire up global inflation again, putting real incomes back under pressure and leaving less room for central banks to lower interest rates in 2024. Some emerging markets would thrive in an environment of higher oil prices, but most face a period of sluggish growth as higher interest rates and subdued external demand bite. China’s reopening won’t benefit the global economy much The upshot is that while abandoning ZCP has clearly improved the outlook for China this year, the rest of the world may not benefit much, if at all. Indeed, while we have also revised up our expectations for growth in the US and eurozone this year, the upgrades are due to domestic factors rather than a boost from China. David Rees, Senior Emerging Markets Economist, Schroders Important information: For professional investors and advisors only. The material is not suitable for retail clients. We define “professional investors” as those who have the appropriate expertise and knowledge eg asset managers, distributors and financial intermediaries. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Information herein is believed to be reliable, but Schroders does not warrant its completeness or accuracy. Issued in March 2023 by Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) which is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services provider in South Africa FSP No: 48998. www.bluechipdigital.co.za 41
