China’s economy expanded by just 3% in 2022, far below the government’s own target, marking one of the worst performances in nearly half a century. Growth was impacted heavily by months of widespread Covid lockdowns and a historic downturn in the property market.
Still, the number came in slightly better than market expectations, with some signs of stabilization in the final weeks of 2022 because of policy support in infrastructure investment and credit expansion.
Gross domestic product (GDP) increased 2.9% in the fourth quarter, according to China’s National Bureau of Statistics on Tuesday. A Reuters poll of economists had previously estimated expansion of just 1.8% for the fourth quarter and 2.8% for 2022.
“China’s domestic economy has suffered unexpected shocks in 2022, including frequent Covid outbreaks and extreme heatwaves,” Kang Yi, director of the NBS, told a press conference in Beijing.
“The triple pressures of demand contraction, supply shocks, and weakening expectations continue to evolve, and the complexity, severity, and uncertainty of the environment are increasing.”
China had taken a zero-tolerance approach to the coronavirus since the pandemic began. But three years of restrictions have wreaked havoc on the economy, sparked public anger and placed extraordinary pressure on local governments’ finances. Amid growing pressure, the government abruptly changed course in early December, effectively ending its controversial zero-Covid policy.
However, while the easing of restrictions was a relief for many, its abruptness caught the public off guard, leaving people largely to fend for themselves.
The rapid spread of infection drove many people indoors and emptied shops and restaurants. Factories and companies have also been forced to shut or cut production because more workers got sick.
“Q4 data surprised to the upside against depressed expectations. But be that as it may, the data still confirms a depressing end to a challenging year for the Chinese economy,” said Aidan Yao, senior emerging Asia economist at AXA Investment Managers.
Tuesday’s data offered a glimpse into how the Covid surge has disrupted the economy in the past month. Retail sales fell 1.8% in December, falling for a third month in a row.
The contraction was mainly caused by the spread of Covid, as “most people got infected and stayed at home,” said Chaoping Zhu, global market strategist at JP Morgan Asset Management.
For the entire year, retail sales dropped 0.2%, while it had seen a 12.5% growth in 2021.
Meanwhile, industrial production growth slowed to 1.3% in December, the weakest in seven months. For 2022, it rose 3.6%, compared to 9.6% in 2021.
But there are some bright spots.
Investment in fixed assets increased 5.1% during the January-to-December period. Basic infrastructure investment—which covers railways, ports and telecommunications networks— jumped 9.4% for the whole of last year. Investment in electrical machinery and equipment manufacturing soared by 42.6% during the same period.
The growth was thanks to the government’s infrastructure investment push and monetary easing efforts, analysts said.
“The good news is that there are now signs of stabilization, as policy support doled out towards the end of 2022 is showing up in the relative resilience of infrastructure investment and credit growth,” said Louise Loo, senior economist for Capital Economics, in a research note.
Consumer spending is still lagging, but overall economic growth should pick up more strongly from March, she added.
“Q4 has likely marked the darkest before the dawn,” Yao said. “It is possible that part of December’s data surprise reflected the bottoming of economic activity in cities that have already passed the peak of infections by the middle of the month.”
Policymakers have recently vowed to go all out to save the economy in 2023, betting on the private industry to bolster growth.
They have eased pressure on the embattled tech and property industries, which have been reeling from a sweeping regulatory crackdown on private enterprise since 2020.
The moves have boosted investor and analyst confidence about a significant rebound in China’s economy. So far, a group of government economists and international analysts have raised their China growth forecasts to between 4.3% and 5.4% for 2023. Some expect Beijing to set a growth target above 5%.
But the country still has a number of challenges ahead.
“Risks persist in the property sector and local government debt,” said Zhu.
He expects an additional interest rate cut in the first quarter, followed by further monetary easing measures by the central bank.
“China’s 2023 will be bumpy; not only will it have to navigate the threat of new Covid waves, but the country’s worsening residential property market and weak global demand for its exports will be significant brakes,” said Harry Murphy Cruise, economist at Moody’s Analytics.
The statistics bureau also revealed that China’s population shrank. The country had 1.4118 billion people in 2022, down some 850,000 people compared to 2021. Analysts said the decline was the first since 1961.
“China cannot rely on the demographic dividend as a structural driver for economic growth. Going forward demographics will be a headwind,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management. “Economic growth will have to depend more on productivity growth, which is driven by government policies.”