China Q1 GDP surprises on the upside

Chinese Q1 GDP growth came in stronger than expected at 4.5% y-o-y in Q1 23 (2.2% q-o-q seasonally adjusted). The upside surprise was mainly driven by household consumption as well as by a surprising resurgence of exports in March. In light of stronger-than-expected GDP figures in Q1, we have decided to revise up our 2023 full-year GDP forecast for China to 5.5% from 5.0% previously.

However, the Q1 GDP figures showed muted growth in fixed-asset investment, which came in below consensus expectations. While infrastructure and manufacturing investment continued to hold up, property investment showed only limited improvement. The recovery in housing demand remains gradual. Weakening global growth will likely weigh on Chinese exports in the months ahead, and the rebound in domestic demand will likely be gradual. The overall unemployment rate declined to 5.3% in March (below the government’s target of 5.5%), but the job market for youth (15-24 age group) remained challenging, with the youth unemployment rate rising further to 19.6%.

But muted inflation in China allows policy makers to focus on boosting growth. Headline and core inflation alike fell to 0.7% y-o-y in March. This was below our expectations and caused us to revise down our full-year inflation forecast to 2% from 3%. With the recovery of household confidence and employment being the key focus this year, we expect targeted policy support to continue.

Indeed, Chinese credit growth has consistently beat market expectations since the beginning of 2023, mainly driven by the strong momentum in new corporate loans and government bonds. Meanwhile, the People’s Bank of China cut the required reserve ratio for commercial banks by 25bps in late March, signalling continued, prudent monetary easing.

To summarise, China’s post-covid recovery is well underway, but the pace is still uneven. There is clearly room for further improvement in domestic demand and housing. We expect Q2 GDP growth to be stronger in y-o-y terms due to a flattering base effect (essentially the Shanghai lockdown last year). But on a sequential basis, Q1 probably marked the peak of growth momentum in China. We expect the recovery to moderate in H2 as global demand wanes.