FocusEconomics Consensus Forecast East & South Asia
Outlook Improves - Focus Economics
Outlook Improves - Focus Economics
The economy expanded 6.5% in Q4, more than expected, underpinned by an export surge and robust industrial output. Moreover, private consumption likely also gained steam, as suggested by recovering retail sales. That said, momentum in December appeared more mixed: While industrial production picked up speed, retail sales growth slowed, potentially due to cold weather. Turning to 2021, GDP growth will be flattered in Q1 by a highly favorable base effect. However, underlying momentum will likely be hit somewhat by the coronavirus outbreak in North China and tighter social distancing rules. In politics, the inauguration of Joe Biden as the U.S. president should herald a rhetorically more civil relationship between the two powers, although any rollback of U.S. tariffs and restrictions on Chinese tech firms is unlikely in the near term.
The recovery from the coronavirus-induced slump is expected to strengthen this year amid stronger domestic and external demand. That said, a possible worsening of the domestic Covid-19 outbreak, uncertainty regarding the China-U.S. relationship and elevated corporate debt levels—against the backdrop of a string of recent bond defaults— pose risks to the outlook. FocusEconomics panelists expect GDP to expand 8.4% in 2021, which is up 0.3 Percentage Points from last month’s estimate. In 2022, the panel foresees GDP expanding 5.3%.
Inflation came in at 0.2% in December, contrasting November’s 0.5% drop in prices—which had marked the first annual decline since 2009. Price pressures should rise in 2021 thanks to firming energy prices and stronger domestic demand, but improved food supply—particularly of pork, as farmers rebuild their hog herds in the wake of African swine fever—will limit the increase. Our panelists forecast that inflation will average 1.7% in 2021, which is down 0.2 percentage points from last month’s estimate, and 2.2% in 2022.
In recent weeks, the People’s Bank of China (PBOC) kept its policy settings unchanged as the economy remained on the path to recovery. Looking forward, most panelists see the Bank’s key interest rate levers unchanged in 2021, although the PBOC is likely to gradually withdraw liquidity in a bid to dampen down on systemic financial risks. Panelists project the one-year deposit rate to end 2021 at 1.53% and 2022 at 1.63%. The loan prime rate is seen ending 2021 at 3.85% and 2022 at 3.94%.
On 22 January, the yuan traded at 6.48 CNY per USD, appreciating 0.9% month-on-month, due to a combination of significant interest rate and growth differentials compared to China’s main trading partners. The currency is expected to remain broadly at current levels ahead. Our panelists see the yuan ending 2021 at 6.47 CNY per USD and 2022 at 6.45 per USD.
REAL SECTOR | Economy continues to gain speed in the fourth quarter
The economy continued to recover in the fourth quarter, expanding 6.5% in annual terms (Q3: 4.9% year-on-year) and outpacing market expectations of 6.1% growth. Seasonally-adjusted quarter-on-quarter GDP rose 2.6% in Q4, following the 3.0% expansion in Q3. That said, data for the month of December was more mixed, with retail sales, credit growth and PMI readings all losing steam. Over 2020 as a whole, the economy recorded 2.3% growth, making China one of the few economies to register an expansion. Although the National Bureau of Statistics (NBS) does not provide a breakdown of GDP by expenditure, available data suggests the external sector likely supported activity in the fourth quarter, amid booming exports of medical equipment and technology devices. Moreover, stronger private spending, amid improving consumer confidence and a lower unemployment rate, should have underpinned momentum, while investment and industrial activity also gained ground in the fourth quarter.
Looking ahead, the economy’s performance in Q1 2021 will be supported by an incredibly favorable base effect. Moreover, exports should stay robust as pandemic-related goods remain in high demand. However, the recent outbreak of coronavirus in Northern China, centered on Hebei province—and localized restrictions to contain the spread—could dent services activity somewhat. On the outlook, Samuel Tse, economist at DBS Bank, commented: “On entering 2021, investment will remain as the prime growth engine. Amongst all, new infrastructure investment [...] will see stunning growth alongside Beijing’s push for self-reliance in technology. In fact, it rose by 12.5% for 2020, outpacing the mild growth of the overall headline figure.
We expect GDP will grow by 12.0% in 1Q21 and 7.0% for the entire year. However, investors should note the following three downside risks that could potentially impact the growth outlook:
(i) Temporary electricity shortage in 1Q amid cold weather.
(ii) Renewed Covid outbreak – total daily new cases were over 100 on entering mid-January. This is particularly alarming as Chinese New Year is approaching.
(iii) Increasing debt risks.” Regarding the evolution of relations with the U.S.—which could have an important bearing on the external sector, as well as private investment—Iris Pang, chief China economist at ING, stated: “We expect the newly elected U.S. government will continue most of the current policies on China, at least for the first quarter. That means tariffs and technology measures on China will still be in place. The most positive development we can envisage is that tariffs could be reduced gradually over 2021 with no additional pressure on the technology side. It is difficult to conceive of a dramatic improvement in the U.S. attitude towards China’s technological advancement.” Panelists project GDP to expand 8.4% in 2021, which is up 0.3 percentage points from last month’s estimate. In 2022, the panel sees growth slowing to 5.3%.