Our 2023 forecast for the Chinese economy

The Chinese government has finally started to change some of the policies that have inflicted massive pains on the economy over the past one and a half years. If well implemented, the recently announced financial support to property developers will likely lead to stabilisation in this sector in the coming months so that it may be less of a drag on the economy in 2023. 

That said, for structural reasons we do not expect a major rebound in China’s property sector. Underlying demand for urban housing in China will likely cool for demographic reasons. Supply could massively exceed demand if the former reverts to its trajectory before 2021. Hence, China’s housing market probably will stay on a downward trend in the coming years before it settles into a new equilibrium.

The government has also swiftly pivoted towards re-opening after a wave of large-scale protests against stringent covid controls broke out across the country. This could be a messy process. It is highly probable that the medical system will come under severe pressure in the coming months, causing stress in parts of Chinese society and leaving the economy facing more disruption in the near term. 

Our expectation is therefore that Chinese economic growth may remain muted in the first half of 2023 before a stronger rebound in the second half. Our full-year GDP forecast stands at 4.5% for the time being (up from about 3% in 2022).

As the economy will likely stay weak in the first half of the 2023, we expect the People’s Bank of China (PBoC) to maintain monetary easing next year, with additional rate cuts, likely in H1. Consumer inflation, which has been muted in 2022 (2.2% expected for the full year), may rise moderately in 2023 due to higher food prices, but the overall weakness of demand, both domestically and, increasingly, abroad as well, will likely ensure the rise in inflation is moderate. All in all, our expectation that China’s headline inflation will rise to an annual 3% in 2023 should not hinder the PBoC’s monetary easing.

However, the space for further fiscal policy easing may be constrained. The current crisis in the property sector has greatly reduced local governments’ revenues. Without a significant rise in the central government’s fiscal deficit above its usual level of about 3% of GDP (2.8% in 2022), which is unlikely, the room for an increase in fiscal spending next year looks limited.