Fitch Ratings Upgrades China’s Economic Forecast to 5% Growth

According to a revised forecast by Fitch Ratings, China’s economy is expected to grow by 5% in 2023, which is a marked improvement from its previous prediction of a 4.1% growth made in December. The updated outlook is a result of a faster-than-anticipated recovery in consumption and activity after the government relaxed most of its stringent COVID restrictions.

The latest reading of China’s purchasing managers’ index (PMI) for manufacturing and services, which reflects business activity, also points to further growth. In January, China’s official manufacturing PMI rose to 50.1 and its services PMI increased to 54.4, which is the highest level since June 2022.

Despite recent outbreaks of COVID, Fitch notes that it is subsiding and predicts a strong activity in 1H23. The economists at Fitch believe that stabilizing the recovery will be the priority in the near term, but they do not expect any aggressive macro-policy easing.

Although many economists believe in a consumption-driven economic recovery, UBS has a different outlook and predicts that spending will be more cautious due to a lack of consumer confidence. According to the Swiss bank’s chief China economist, Wang Tao, Chinese households have a combined extra savings of around 4-4.6 trillion yuan ($590 billion to $678 billion).

Wang and his team noted that the employment rate and household income still need to improve, which may prevent a full recovery of consumer confidence and result in a more cautious spending approach. UBS believes that the excess savings may not be fully utilized until 2023.

Ultimately, the bank predicts that China’s household consumption will increase by 10-11% in nominal terms and 7.8% in real terms in 2023. Wang believes that a continued return to normal consumer behavior and a release of excess savings could further boost consumption recovery in 2024 and beyond.