China’s reopening process has come faster and earlier than expected. After announcing a gradual easing of its zero-Covid policy in November, the National Health Commission finally decided to downgrade the Covid-19 risk level in late December.The economic, social and fiscal costs of the zero-Covid policy led to enormous uncertainty over the economy, weighing heavily on consumption and investment.
At the same time, the rate of infection linked to the lifting of restrictions has put huge pressure on economic activity. The current wave of infections is expected to peak in mid-January, while a second wave – driven by the spread to rural areas – is estimated to reach its peak in early March.Given this context, Coface is forecasting a gradual normalisation of economic activity in March with a firm recovery starting in Q2 2023.
Increasingly unsustainable zero-Covid policy
The Covid-control measures introduced in China have hurt domestic demand with a negative impact on household spending. Compulsory testing and lockdown fears have severely suppressed consumption. Retail sales were flat in the first 11 months of 2022, and labour market prospects weakened with the unemployment rate hitting 5.7% in November.Manufacturing production and logistics were also disrupted by the Covid-control measures, with industrial output growth slowing markedly to 2.2% in November and supplier delivery times lengthening sharply. China has also been faced with a weakening external outlook. Exports were one of the key drivers for the country’s growth during the pandemic and in 2022, but external demand is now expected to be much weaker in 2023 with the slowdown in global growth. Goods exports in November fell by 8.7% year-on-year.A case could have been made for maintaining the zero-Covid policy due to the October 2022 congress held by the Chinese Communist Party. But the strict control measures,…
