David Rosenberg: China won't be able save the global economy this time

Passengers wait to board trains at Shanghai’s Hongqiao Railway Station during the annual Spring Festival travel rush ahead of the Chinese Lunar New Year. Photo by REUTERS/Aly Song

China’s reopening was no doubt an important trigger for the recent global stock market surge. Buoyed by the easing of mobility restrictions, this year’s growth in China will bounce back after a disastrous 2022, and the normalization of supply chains will add to global disinflationary pressures, both good news for the world economy.

The uptick in travel will boost not just China (for example, the demand for luxury goods), but also tourist destinations in neighbouring countries, while the jump in output should be supportive of commodities such as oil and industrial metals.

We’re cautious, however, about the longer-term outlook because increased mobility, further inflated this month by travel related to the Chinese New Year, combined with poor vaccine efficacy do not bode well for the fight against COVID-19. As such, self-regulation by citizens amid rising infection risks, coupled with negative wealth effects tied to ongoing real estate woes, could limit consumption and, hence, overall growth.

For investors, that means keeping an eye on COVID-19 data and the real estate sector to see if the growth uptick in the first half of 2023 can be sustained. If those metrics don’t improve, we would recommend taking advantage of rallies to shed risk — cyclical stocks, commodities and currencies tied to them such as the Canadian and Australian dollars.

Mobility is on the rise

After a dreadful 2022, when its economy was hammered by a real estate meltdown and COVID-19-related lockdowns, China is now making a comeback thanks to the easing of government restrictions. Mobility is on the rise, with investors seemingly enticed by positive growth implications, as evidenced by the global stock market surge of the past few weeks.

The Ministry of Transportation estimates there were nearly 35 million travellers on the first day of the rush ahead of the Spring Festival (slated to start on Jan. 22 and end on Feb. 5), and expects total passenger flow related to the festival to be about 2.1 billion. That’s nearly double the flow during the same period last year, and 70 per cent more than what it was in 2019 (pre-pandemic).

This massive pent-up demand for travel should come as no surprise after severe restrictions to mobility over the past couple of years, courtesy of COVID-19. This is supportive of demand for luxury goods (Europe is a big beneficiary) and output (positive for commodities such as oil and industrial metals).

Demand for freight has also significantly increased. According to the Ministry of Transportation, while there were decreases in goods transportation during the Spring Festival in prior years, this year is expected to be different amid increased demand particularly for medical supplies, food and energy.

All that presages a blowout real gross domestic product growth print for Q1, putting China firmly on track to top last year’s disappointing performance: the World Bank’s latest growth forecasts peg China at 4.3 per cent this year versus last year’s three per cent.

Real estate and consumption woes

That’s not to say China is in the clear. Given the government’s previous stop-and-go approach with regards to COVID-19 restrictions, there’s always the possibility of lockdowns making a comeback if fatalities climb to unacceptable levels.

The surge in travel related to the Spring Festival, coupled with poor efficacy of domestically produced vaccines — which explains in part why new infections remain elevated despite a nearly 90 per cent full vaccination rate — may lead to an increase in COVID-19-related deaths (although it’s unclear if that will be reflected in government-controlled data releases).

Even if Beijing refrains from bringing back lockdowns, odds are that citizens will self-regulate amid the rise in fatalities and distrust of official government data/reassurances. That translates to less money being spent than would otherwise be the case. The reputable Peterson Institute for International Economics also seems cautious about China’s consumption outlook.

In any case, aside from travel, it’s unclear if pent-up demand can be fulfilled given that household wealth has been decimated by the real estate meltdown — note that roughly two-thirds of household savings is tied up in real estate. It’s no wonder the National Bureau of Statistics’ measure of consumer confidence sank last November to a meagre 85.5, the lowest ever recorded (data goes back to 1990).

It will take more than just the ongoing monetary policy easing by the People’s Bank of China to stimulate domestic demand.

Trade outlook is not great

Perhaps that explains why the Ministry of Finance vowed to boost this year’s growth through “appropriate” fiscal expansion. Beijing is reportedly seeking to increase the debt quota of local governments (to encourage investment) and to target a larger budget deficit.

Still, without a turnaround in real estate and consumption, it’s difficult to envisage this year’s uptick in domestic demand, after last year’s awful performance, will be sustainable.

The contribution of trade to growth is also uncertain amid a looming global recession. The latter does not bode well for China’s export volumes, while real imports have limited downside after last year’s collapse. In other words, for the first time in years, trade could potentially subtract from China’s annual growth in 2023.

Those headwinds perhaps explain why the World Bank sees China’s growth being limited to just 4.3 per cent in 2023 despite the reopening — that is well below the six-plus per cent pre-pandemic pace. Note that this 1.3-percentage-point uptick from 2022 adds about half-a-percentage point to the world’s real GDP growth, although you won’t notice that by just looking at the international agency’s forecasts, which show global GDP growth slowing from an estimated 2.9 per cent last year to a meager 1.7 per cent in 2023 (the weakest growth in 30 years if you exclude the 2008/2009 and 2020 recessions), courtesy of the lagged impacts of last year’s aggressive policy tightening by world central banks.

Simply put, China’s uptick won’t be enough to steer the global economy away from a downturn.

David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc. Krishen Rangasamy is a senior economist there. You can sign up for a free, one-month trial on Rosenberg’s website.