China’s Economy Rebounds, Spurred by Consumption

Revival of GDP growth appears broadly on track after country’s zero-Covid exit

· Industrial production in the first two months rose 2.4%, up from a 1.3% increase in December. Investment in fixed assets such as infrastructure and machinery increased 5.5%.

· Exports fell 6.8% during January and February compared with the same period a year ago

· Unemployment rate in urban areas stood at 5.6% in February, slightly higher than January’s 5.5%.

· Youth unemployment remained high, with 18.1% of those surveyed aged 16 to 24 out of work.

Economic activity in China rebounded in January and February as the country emerged from almost three years of tough Covid-19 controls, adding to signs of resilience in the global economy after the sudden collapse of two U.S. banks unnerved investors.

The data suggest China’s expected recovery is broadly on track after posting one of its weakest years for growth in decades in 2022. A pickup in retail sales suggests consumption is taking over as the engine of growth while factories contend with sinking exports and the real-estate sector shrinks, figures published Wednesday show.

But the data also included some weaker signals, especially on jobs, that imply the world’s second-largest economy might need more support from policy makers if it is to reach officials’ new growth target of around 5% for the year, economists said.

For the global economy, China’s rebound comes as business surveys from Europe and the U.S. suggest growth is holding up better than expected despite higher borrowing costs and persistent inflation, but also as the collapse of Silicon Valley Bank and Signature Bank in the U.S. rattle financial markets. A third lender, owned by Silvergate Capital Corp., is voluntarily winding down its operations.

Those crosscurrents are clouding the outlook for interest rates, as the U.S. Federal Reserve and other central banks weigh the need to bring inflation down against the risk of new turmoil in the banking system.

A stronger China should help buttress global growth, though economists caution the benefits for other economies may be limited, as a consumption-led recovery will mean less demand for imports from the rest of the world than the stimulus and investment-fueled bursts of Chinese expansion in the past.

“If China is doing better it helps the global economy as a whole,” said Julian Evans-Pritchard, head of China economics at Capital Economics in Singapore. “But this China rebound is a bit different to your usual China rebound.”

Retail sales in China grew 3.5% in January and February compared with the same period last year, marking a sharp turnaround from the 1.8% annual contraction recorded in December, China’s National Bureau of Statistics said Wednesday.

Industrial production in the first two months rose 2.4%, up from a 1.3% increase in December. Investment in fixed assets such as infrastructure and machinery increased 5.5%.

China’s statistics agency combines major economic indicators for January and February to avoid distortions from holidays around Lunar New Year, when businesses take a break and workers head home for family reunions.

The revival in economic activity followed the dismantling of China’s signature zero-Covid strategy in December after almost three years of strict controls aimed at smothering even the tiniest disease outbreaks.

The strategy initially allowed China’s economy to recover quickly after the eruption of the global pandemic. But it came undone when tested against more transmissible variants of Covid-19. Repeated lockdowns in major cities including Shanghai dragged China’s economic growth down to 3% last year, one of the weakest rates of expansion since the 1970s.

Beijing abruptly ditched the policy late last year, leading to a wave of infections that strained hospitals and disrupted business and daily life. By early January, the worst of the outbreak appeared to have passed, and Wednesday’s figures confirm the rebound in the economy suggested by business surveys and data such as cinema outings, restaurant bookings and subway rides.

For China, growth this year is likely to lean heavily on consumption. Exports are faltering as Western economies lose momentum, while the real-estate sector is in the doldrums, cutting off two of its most dependable engines of growth.

Exports fell 6.8% during January and February compared with the same period a year ago, data last week showed. Wednesday’s figures suggest the slowdown in property is moderating, with smaller declines in investment and new home starts in January and February than in 2022, but economists are doubtful the sector will add to growth this year.

How durable a consumption-led recovery will be in China is unclear. Households are flush with savings but nervous about jobs and the housing market.

The unemployment rate in urban areas stood at 5.6% in February, slightly higher than January’s 5.5%, the statistics bureau said Wednesday, though it added that the change likely reflected seasonal factors as workers change jobs during the Lunar New Year holidays. Youth unemployment remained high, with 18.1% of those surveyed aged 16 to 24 out of work.

Carlos Casanova, senior Asia economist at Union Bancaire Privée in Hong Kong, said the jobless figures imply small and midsize businesses in China are still finding it tough after the lifting of Covid-19 controls. He said policy makers need to ensure private businesses have adequate access to finance to weather the disruption of reopening and create new jobs.

“We are in this transition phase and it looks like they are struggling,” he said.

He added that consumption growth needs to pick up further if the government is to meet its target for gross-domestic-product growth this year of around 5%, a relatively conservative goal compared with the rapid pace that was common before the pandemic.

Policy makers should consider reinstating subsidies for electric vehicle purchases that expired in 2022, he said, and ensure they continue to keep a lid on inflation. Consumer prices in China rose just 1% on the year in February, down from a 2.1% increase in January.