During china’s lunar-new-year holiday, which ran from January 21st to 27th, tourists flocked to the sprawling Taihao mausoleum in Henan province. Many enjoyed slapping a statue of Qin Hui, a scheming official in the Song dynasty who is notorious for having framed a military hero. One visitor got carried away, striking the statue with the lid of an incense burner. Feelings are running high after Qin’s villainy featured in a new film, “Full River Red”, which topped the box-office charts during the holiday.
This enthusiastic movie-going, sightseeing and statue-slapping is evidence of a surprisingly speedy consumer revival in the world’s second-biggest economy. The mausoleum says it received 300,000 visitors in the festive period, the most in three years. Box-office revenues were not only better than last year, they were also higher than in the year before covid-19. China’s population, subject until recently to mass screening, is now massing at the screens.
The recovery is arriving earlier than expected because the virus spread faster. Since China hastily abandoned its zero-covid regime, infections appear to have passed remarkably quickly. State epidemiologists estimate that at least 80% of the population has already caught the disease. According to official figures, hospital inpatient numbers peaked on January 5th. A second wave of infections was expected after holiday travel spread the disease from cities to villages. But the virus beat the festive rush. The much-feared second wave appears to have merged with the first, notes Airfinity, a life-sciences data firm.
Although the death toll from all these infections is unknown, the economic aftermath is becoming clearer. As people have caught and recovered from the virus, China’s service economy is returning to life. An index of activity outside the manufacturing sector, based on monthly surveys of purchasing managers, jumped from 41.6 in December to 54.4 in January, the second-biggest leap on record. Xiaoqing Pi and Helen Qiao of Bank of America observe that activity in the service sectors “battered by the pandemic”, such as retail, accommodation and dining, has risen sharply.
On Meituan, an e-commerce platform, some restaurants have amassed waiting lists 1,000 tables long. People used to queueing for pcr tests now wait to pray at popular temples. In Hangzhou, the capital of Zhejiang province, people gathered outside the Linshun temple at 4am to light incense for the God of Wealth. Others who reached the top of the spectacular Tianmen mountain in Hunan province, famous for its vertiginous glass walkways, had to wait until 9pm to catch a cable car back down, according to the National Business Daily, a state newspaper.
Can this frenetic pace be sustained? Optimists point out that households are unusually liquid. Their bank deposits now exceed 120trn yuan ($18trn), over 100% of last year’s gdp, and 13trn yuan more than might have been expected given pre-pandemic trends, according to Citigroup, a bank. These deposits could provide ammunition for a bout of “revenge spending”.
Yet the ammunition may be set aside for other purposes. Much is composed of cash that nervous households kept in the bank rather than using to buy property or ploughing into a mutual fund. They are unlikely now to lavish it on goods and services. More likely, reckons Citigroup, is a bout of “revenge risk-taking”, as households gain confidence to buy bonds and shares that are less safe but potentially more rewarding than a bank deposit. This would lift asset prices and give a much-needed boost to the housing market.
Perhaps a more accurate way to assess the forthcoming spending boom is therefore to look at the gap between household income and consumer spending. In the three years before the pandemic, households saved 30% of their disposable income. During the pandemic they saved 33%. The cumulative result of this extra saving is about 4.9trn yuan. If consumers added that to their spending this year it would increase their consumption by 14% (before adjusting for inflation).
The exact size of the spree will ultimately depend on broader economic conditions. Property prices have fallen and the job market is weak, with youth unemployment still above 16%. But China’s labour market has bounced back quickly after previous covid setbacks, and jobless youngsters count for only about 1% of the urban labour force. With luck, a bit of extra spending will result in higher sales and stronger hiring, in turn motivating additional spending. All this means consumption could account for the lion’s share of China’s growth this year: almost 80%, according to Citigroup, if government spending is included. This would be the highest share for more than two decades.
China’s splurge will make a welcome contribution to global growth. According to the imf’s forecasts, released on January 30th, the country’s economy will grow by 5.2% this year, accounting for two-fifths of the expansion in the world economy. Together, America and the euro area will contribute less than a fifth.
A recent study by economists at America’s Federal Reserve makes a basic point with its title: “What Happens in China Does Not Stay in China”. Their estimates suggest a policy-induced expansion in China’s gdp of 1% adds about 0.25% to the rest of the world’s gdp after a year or two. The authors do not examine spillovers from China’s reopening. But their results give some indication of the possible consequences. If China’s reopening lifts the domestic growth rate from 3% to 5-6% this year, the spillover effects may be 0.5-0.75% of the rest of the world’s gdp, or about $400bn-600bn at an annualised rate.
An uptick in growth would not be an unalloyed good, however. Central banks still want to quash inflation. If higher Chinese demand adds to price pressures, policymakers may feel obliged to slow their economies by raising interest rates or delaying cuts. Lael Brainard, vice-chairwoman of the Fed, has noted that China’s exit from zero-covid has uncertain implications for global demand and inflation, especially in commodities. Christine Lagarde, head of the European Central Bank, has warned it will increase “inflationary pressure”, because China will consume more energy. According to Goldman Sachs, another bank, reopening could add $15-21 to a barrel of Brent crude oil, now trading at around $80.
After the Asian financial crisis in 1997, the Chinese economy helped to stabilise the region. After the global financial crisis a decade later, China’s growth helped to stabilise the world. This year it will once again make the single biggest contribution to global growth. But whereas in the past China’s contribution came from investment spending, now consumption will take the lead. Chinese consumers have traditionally punched below their weight. This year they will hit harder. ■
One of the most uncomfortable arguments to make in America is that the people are wrong. It’s especially uncomfortable when the subject is something you experience in a more comfortable, privileged way than most people. And so when liberal economic elites insist the economy, which opinion polls consistently find the public considers terrible, is actually very good, it makes liberal economic elites come off badly.
Paul Krugman is one of those dreaded liberal elitists who believes the economy is actually good. So (at a much lower level of confidence and frequency) am I. We have developed a number of explanations for why people believe an economy that TheWall StreetJournal recently called “the envy of the world” is so awful.
The most generous of these accounts is that people consider higher wages something they earned and higher inflation something that happened to them. But all the explanations involve conceding some level of basic irrationality on the part of the public. And the attempts to make sense of public assessments of the economy seem deeply unconvincing.
Biden’s low economic ratings are “not hard to grasp,” argues Robert Kuttner in the left-wing American Prospect, “None of the recent improvements have altered the basic situation of most Americans, in which reliable careers are scarce, college requires the burden of debt, health coverage is more expensive and less reliable, and housing is unaffordable.” The solution, Kuttner argues, is for Biden to implement “radical” economic reforms along the lines of those promised by Bernie Sanders in 2016.
Kuttner’s hypothesis fails to explain why Americans were thrilled by economic conditions as recently as 2019, when the same basic features of the economy remained in place. Indeed, it fails to explain why Americans have ever considered the economy to be healthy, given that Bernie-style social democracy has, famously, never been tried in the United States.
Michael Powell, writing in the Atlantic, flays liberals in general, and Paul Krugman in particular, along lines similar to Kuttner’s:
The modern Democratic Party, and liberalism itself, is to a substantial extent a bastion of college-educated, upper-middle-class professionals, people for whom Biden-era inflation is unpleasant but rarely calamitous. Poor, working-class, and lower-middle-class people experience a different reality. They carry the searing memories of the Great Recession and its foreclosure crisis, when millions of American households lost their home. A large number of these Americans worked in person during the dolorous early days of the pandemic, and saw its toll up close. And since 2019, they’ve weathered 20 percent inflation and now rising interest rates—which means they’ve lost more than a fifth of their purchasing power. Tell these Americans that the economy is humming, that median wage growth has nudged ahead of the core inflation rate, and that everything’s grand, and you’re likely to see a roll of the eyes.
Powell makes several claims here, all of them deeply flawed.
He argues the working class considers the economy terrible because of “searing memories” of the Great Recession and then the pandemic. Yet, like Kuttner, he fails to explain why these same voters considered Trump’s economy to be so splendid. Memories of the Great Recession and its aftermath were fresher under Trump than they are now. And the worst and deadliest period of the pandemic actually occurred under Trump, which makes the current nostalgia for Trump’s economy all the more incompatible with Powell’s hypothesis.
It is true, as he writes, that prices have risen 20 percent since 2019. But that doesn’t mean people have “lost more than a fifth of their purchasing power.” Purchasing power is a function of the relationship between what things cost and how much you have to spend. Wages have been rising faster than inflation since last year, and the average American is better off than before the pandemic.
What’s more, contrary to Powell’s argument that the working class has suffered under Biden’s inflationary economy, wages have grown much faster at the bottom than at the top.
Powell reasons that public opinion is essentially dispositive. If the people feel the economy is bad, then it’s bad, regardless of what economists like Krugman tell them. “Working- and middle-class Americans,” he argues, “are wiser to trust their feelings and checking accounts than to rely on liberal economists.”
The trouble here is that polling finds plenty of public optimism about the economy in contexts other than asking people how the American economy is doing. An Axios poll earlier this year found 63 percent of Americans rate their personal financial situation as “good,” a figure in line with historical levels. That is also reflected in people’s spending practices — they are behaving as though the economy were booming, even if they don’t think it is.
A Wall Street Journalpoll last month of seven swing states found a gigantic disconnect between the public’s view of economic conditions in their own state and in the country as a whole. Fifty-four percent of respondents believe economic conditions in their state are excellent or good. But only 36 percent of respondents said the same of economic conditions in the country.
Now this was a poll of seven swing states, not the entire country. I suppose you could imagine the swing states are in dramatically better economic shape than the rest of America, though if that were true, you’d expect Biden to be polling a little better.
What this suggests to me is that public assessment of the economy reflects something other than an objective assessment of economic conditions. People think they are doing well and their state is doing well but the country is doing horribly. Must we assume some deep wisdom underlies these seemingly irreconcilable beliefs? Sometimes people, even with the benefit of close personal experience, just believe things that aren’t true.
IMF Chief Economist Pierre-Olivier Gourinchas and IMF Research Department Deputy Director Petya Koeva Brooks hold a news briefing at IMF headquarters, in Washington, on April 16.MANDEL NGAN/Getty Images
The International Monetary Fund has upgraded its outlook for the global economy this year, saying the world appears headed for a “soft landing” – reining in inflation without much economic pain and producing steady if modest growth.
The IMF now envisions 3.2 per cent worldwide expansion this year, up a tick from the 3.1 per cent it had predicted in January and matching 2023′s pace. And it foresees a third straight year of 3.2 per cent growth in 2025.
In its latest outlook, the IMF, a 190-country lending organization, notes that the global expansion is being powered by unexpectedly strong growth in the United States, the world’s largest economy. The IMF expects the U.S. economy to grow 2.7 per cent this year, an upgrade from the 2.1 per cent it had predicted in January and faster than a solid 2.5 per cent expansion in 2023.
Though sharp price increases remain an obstacle across the world, the IMF foresees global inflation tumbling from 6.8 per cent last year to 5.9 per cent in 2024 and 4.5 per cent next year. In the world’s advanced economies alone, the organization envisions inflation falling from 4.6 per cent in 2023 to 2.6 per cent this year and 2 per cent in 2025, brought down by the effects of higher interest rates.
The Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of England have all sharply raised rates with the aim of slowing inflation to around 2 per cent. In the United States, year-over-year inflation has plummeted from a peak of 9.1 per cent in the summer of 2022 to 3.5 per cent. Still, U.S. inflation remains persistently above the Fed’s target level, which will likely delay any rate cuts by the U.S. central bank.
Globally, higher borrowing rates had been widely expected to cause severe economic pain – even a recession – including in the United States. But it hasn’t happened. Growth and hiring have endured even as inflation has decelerated.
“Despite many gloomy predictions, the global economy has held steady, and inflation has been returning to target,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters ahead the release of the fund’s latest World Economic Outlook.
Though the world economy is showing unexpected resilience, it isn’t exactly strong. From 2000 through 2019, global economic growth had averaged 3.8 per cent – much higher than the 3.2 per cent IMF forecasts for this year and next. Keeping a lid on the world’s growth prospects are the continued high interest rates, along with sluggish gains in productivity in much of the world and the withdrawal of government economic aid that was rolled out during the pandemic.
The IMF warns that the economic expansion could be thrown off by the continuing adverse effects of higher rates and by geopolitical tensions, including the war in Gaza, that risk disrupting trade and raising energy and other prices.
China, the world’s No. 2 economy, has been struggling with the collapse of its real estate market, depressed consumer and business confidence and rising trade tensions with other major nations. The IMF expects the Chinese economy, which once regularly generated double-digit annual growth, to slow from 5.2 per cent in 2023 to 4.6 per cent in 2024 to 4.1 per cent next year.
But on Tuesday, Beijing reported that China’s economy expanded at a faster-than-expected pace in the first three months of the year, fueled by policies that are intended to stimulate growth and stronger demand. The Chinese economy expanded at a 5.3 per cent annual pace in January-March, surpassing analysts’ forecasts of about 4.8 per cent, official data show. Compared with the previous quarter, the economy grew 1.6 per cent.
Japan’s economy, the world’s fourth-largest, having lost the No. 3 spot to Germany last year, is expected to slow from 1.9 per cent last year to 0.9 per cent in 2024.
Among the 20 countries that use the euro currency, the IMF expects growth of just 0.8 per cent this year – weak but double the eurozone’s 2023 expansion. The United Kingdom is expected to make slow economic progress, with growth rising from 0.1 per cent last year to 0.5 per cent in 2024 and 1.5 per cent next year.
In the developing world, India is expected to continue outgrowing China, though the expansion in the world’s fifth-largest economy will slow, from 7.8 per cent last year to 6.8 per cent this year and 6.5 per cent in 2025.
The IMF foresees a steady but slow acceleration of growth in sub-Saharan Africa – from 3.4 per cent last year to 3.8 per cent in 2024 to 4.1 per cent next year.
In Latin America, the economies of Brazil and Mexico are expected to decelerate through 2025. Brazil is likely to be hobbled by interest high rates and Mexico by government budget cuts.
China’s economy made a stronger-than-expected start to the year, even as the crisis in its property sector deepened.
According to official data, gross domestic product (GDP) expanded by 5.3% in the first three months of 2024, compared to a year earlier.
That beat expectations the world’s second largest economy could see growth slow to 4.6% in the first quarter.
Last month, Beijing set an ambitious annual growth target for world’s second largest economy of “around 5%”.
Data from the National Bureau of Statistics (NBS) also showed first quarter retail sales growth, a key gauge of China’s consumer confidence, fell to 3.1%.
“You cannot manufacture growth forever so we really need to see households come to the party if China wants to hit that around 5% growth target,” Harry Murphy Cruise from Moody’s Analytics told the BBC.
In the same period property investment fell 9.5%, highlighting the challenges faced by China’s real estate firms.
The figures came as China continues to struggle with an ongoing property market crisis. According to the International Monetary Fund (IMF), the sector accounts for around 20% of the economy.
The latest data also showed new home prices fell at the fastest pace for more than eight years in March.
The real estate industry crisis has been highlighted in January when property giant Evergrande was ordered to liquidate by a court in Hong Kong.
Rival developers Country Garden and Shimao have also been hit with a winding-up petitions in the city.
Last week, credit ratings agency Fitch cut its outlook for China, citing increasing risks to the country’s finances as it faces economic challenges.
At the annual gathering of China’s leaders in March officials said the economy grew by 5.2% in 2023.
For decades the Chinese economy expanded at a stellar rate, with official figures putting its GDP growing at an average of close to 10% a year.
