As China abandons zero-Covid, what will the economy look like in 2023?

Hong Kong CNN –

As China moves ever closer to fully reemerging from three years of government-imposed Covid isolation and reintegrating with the world, economic expectations are high.

Beijing’s last drop from its strict zero-Covid strategy – which had long stifled businesses – is expected to inject vitality into the world’s second-largest economy next year.

The Covid lockdown and border restrictions have thrown China out of sync with the rest of the world, disrupting supply chains and damaging the flow of trade and investment.

And with the global economy now facing significant challenges, including energy shortages, slowing growth and high inflation, China’s reopening could provide a much-needed and timely boost.

But the reopening process is likely to be messy and painful, according to economists, with the country’s economy on a bumpy ride in the first months of 2023.

China’s historic property slump and a possible global recession could also cause more headaches in the new year, they added.

“In the short term, I believe China’s economy is likely to experience chaos rather than progress for one simple reason: China is poorly prepared to deal with Covid,” said Bo Zhuang, senior sovereign analyst at Loomis, Sayles & Company, a Boston-based investment firm.

For nearly three years, China stuck to its zero-tolerance approach to the virus, even as the policy caused unprecedented economic damage and widespread disillusionment. In 2022, growth slowed significantly, corporate profits fell, and youth unemployment rose to record levels.

Amid growing public unrest and financial pressure, the government abruptly reversed course this month, effectively abandoning zero-Covid.

While the easing of restrictions is a welcome relief for many, its surprise has caught the public off guard and left them largely to fend for themselves.

“In the initial stage, I believe the reopening could unleash a wave of Covid cases that could overwhelm the health care system, reducing consumption and production in the process,” Zhuang said.

Already, the rapid spread of the infection has pushed many people indoors and emptied shops and restaurants. Factories and companies have also been forced to close or cut production because more workers are falling ill.

“Living with Covid will be more difficult than many assume,” said analysts from Capital Economics.

They expect China’s economy to contract by 0.8% in the first quarter of 2023, before recovering in the second quarter.

Other experts also expect the economy to rebound after March. In a recent research report, HSBC economists forecast a contraction of 0.5% in the first quarter, but 5% growth overall for 2023.

China’s haphazard reopening isn’t the only factor dragging down the economy. In 2023, experts will continue to watch as policymakers try to fix the country’s ailing real estate sector, which accounts for nearly 30% of its GDP.

The crisis in the industry – which began in late 2021 when several high-profile developers defaulted on their debt – has delayed or halted the construction of pre-sold homes across the country. That sparked a rare outcry from homebuyers this year, who refused to pay mortgages on unfinished homes.

While Beijing has made a number of efforts to rescue the sector — including unveiling a 16-point plan last month to ease the credit crunch — the statistics still paint a bleak picture.

Property sales by value fell by more than 26% in the first 11 months of this year. Investments in this sector fell by 9.8%.

At a key policy meeting earlier this month, senior leaders pledged to focus on boosting the economy next year, suggesting they will implement new measures that improve the financial health of the property sector and boost market confidence.

“The measures announced so far are not enough to bring about a turnaround, but policymakers have signaled that more support is on the way,” Capital Economics analysts said.

“That should provide enough for homebuyers to boost sales probably before the middle of next year.”

A potential global recession is another key concern that will shape China’s economic landscape in 2023.

Trade had powered much of China’s economic growth earlier this year, as exports were boosted by rising commodity prices and a weaker currency.

But in recent months, the trade sector – which accounts for about a fifth of China’s GDP and provides 180 million jobs – has begun to show cracks from a global economic slowdown.

Last month, China’s exports contracted 8.7% from a year earlier, much worse than October’s 0.3% decline. This marked the worst performance since February 2020, when the Chinese economy nearly ground to a halt amid the initial coronavirus outbreak.

Countries around the world are facing recession as policymakers continue to raise interest rates to combat rising inflation.

“[China’s] exports have already returned much of their pandemic-era boom,” Capital Economics analysts said.

“But a looming global recession means they should probably fall further over the next few quarters.”