"Global Economic Recovery Depends on China? ... Don't Expect It This Year"

[Asia Economy New York=Special Correspondent Joselgina] As warnings of an economic recession deepen mainly in the United States and Europe this year, the world's attention is focused on China. This is due to expectations that China's reopening (resumption of economic activities) after easing COVID-19 restrictions will serve as a growth engine driving the global economy. However, there are also many warnings that this time, we should not place our hopes on China. Since the government-led stimulus policies that drove past economic rebounds are facing difficulties, the ripple effects of China's economy on the world are expected to be weaker than in previous years.

[Image source=EPA Yonhap News]

The Wall Street Journal (WSJ) analyzed on the 13th (local time) that China's recent economic recovery is being driven by consumers rather than massive fiscal stimulus and investment by the government. Frederick Neumann, Chief Economist at HSBC, predicted, "China will achieve a strong economic recovery, but this time, due to the nature of the economic rebound, the growth spillover effects on other countries will be much weaker."

China's past economic crisis recovery model was summarized as large-scale fiscal stimulus and investment led by the government. This not only boosted China's growth rate but also directly helped the global economic recovery. The period immediately after the 2008 global financial crisis is a representative example. However, this time, such large-scale government-led stimulus is difficult. The debt problems of local governments are severe, and the necessary infrastructure facilities have already been fully established. Moreover, China's real estate market continues to be sluggish.

Accordingly, this year's economic rebound in China can only be led by consumers. Recent signals also confirm this from consumers. WSJ analyzed initial data after the easing of 'Zero COVID' policies and found that domestic service industries in China, such as restaurants, bars, and travel, are growing significantly. China's consumer confidence index remains at a low level. This indicates that while the wealthy are opening their wallets, the majority of Chinese people are choosing savings over spending. WSJ pointed out, "The consumer-driven economic recovery in China may be limited to the domestic market rather than abroad," and warned, "We should not rely on China for the global economic recovery."

Earlier, the International Monetary Fund (IMF) forecasted that China's gross domestic product (GDP) will grow by 5.2% this year. This is a clear growth compared to the United States (1.4%) and the Eurozone (0.7%). It also accounts for one-third of global economic growth. Hoe Ee Khor, Chief Economist of the ASEAN+3 Macroeconomic Research Office, explained, "Since the US and Europe are expected to slow sharply, China's rebound this year is very important."

However, Oxford Economics predicted that even if China's GDP grows by 5% this year, it will only raise the global overall growth rate by 1.5%. This is just a 0.2 percentage point upward revision from Oxford Economics' previous forecast.

Goldman Sachs also estimated that China's reopening will increase the global economic growth rate by 1 percentage point this year but analyzed that this growth will mainly be due to increased energy demand and overseas travel. In this case, the biggest beneficiaries may be oil-producing countries and nearby Asian countries. On the contrary, globally, there are concerns about backlash such as a resurgence in energy prices due to increased demand from China. Goldman Sachs estimated that the US economy, which is almost unrelated to China's service sector, could see its growth rate decrease by 0.04 percentage points this year due to rising energy prices from China's reopening.

Concerns about China's still fragile employment market and real estate slump are also pouring in. WSJ stated, "Even if the growth rate rises sharply, fundamental problems remain in China's economy," pointing out the massive debt of local governments and the depressed market despite various real estate industry stimulus measures. This inevitably becomes an obstacle to the recovery of consumer spending. The support payments given to Chinese households during the pandemic were much smaller compared to Western countries. Last year's savings amounted to $2.6 trillion, but most of it was tied up in long-term savings, so less than 30% is immediately available, the newspaper noted.

While luxury manufacturers recently expect a boom due to the recovery of consumption by China's wealthy, a more cautious atmosphere is also observed among global companies targeting consumers. Noel Wallace, CEO of Colgate-Palmolive, said that despite expectations for China's reopening, sales remain sluggish and described China as a "big question mark." Logan Wright, China Market Research Director at Rhodium Group, a research firm headquartered in New York, predicted that China's consumption recovery will be "shallow and short-term."