China and India Economic Outlook : China poised for a rebound; India staying resilient in 2023
China: Urgency Drives Action
China’s growth could see a bottoming out in 2023, as we expect an improvement in the domestic consumption and investment outlook, even as external growth is expected to slow.
Significant uncertainty remains around the pace and timing of the relaxation of COVID-related restrictions, and the impact that it may have on consumer sentiment. Recent data up to the third quarter showed still anaemic consumer confidence (Figure 1) and retail sales; as employment (particularly in the younger age group) and income growth have taken a hit (Figure 2).
Figure 1: Consumer confidence in China remains fragile |
Figure 2: Despite overall stability, youth unemployment has increased |
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Source: CEIC, NBS |
Source: CEIC, NBS |
We expect these consumption indicators to improve as China gradually exits from its stringent zero-COVID policy. From November 2022, there has been an adjustment in pandemic related guidelines, as the government reduced emphasis on quarantine and mass testing measures and moderated the tone on the pathogenicity of the omicron virus[1]. A cautious and systematic approach to easing COVID restrictions can be expected to continue.
A post-COVID-exit consumption rebound, from a release of pent-up demand, could come through in 2023. According to the People’s Bank of China (PBOC) urban depositors’ survey, Chinese households’ preference for savings has risen sharply over 2022, reflecting a high degree of pent-up demand (Figure 3). Services consumption could see a significant bounce-back as well, from an improvement in mobility, particularly in high-contact sectors such as travel, hospitality, and catering.
In addition to a consumption recovery, the drag from the property sector should ease and the government’s infrastructure investment would continue to support the economy. The government’s 16-point support package for the property sector[2], including the relaxation of bank financing, was a significant positive action to stabilise growth in housing. Moreover, fixed asset investment data showed that the economy is already seeing an uptick in infrastructure investment and manufacturing in 2022 (Figure 4), thanks to policy support.
Figure 3: Chinese households’ saving preference has increased sharply during the pandemic |
Figure 4: China Fixed Asset Investment (FAI) in infrastructure is improving and manufacturing is stable |
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Source: CEIC, PBOC Urban depositor survey |
Source: CEIC, NBS |
China’s external trade, however, will have to contend with weaker demand from advanced economies and a lingering tech down-cycle in 2023. (See more details in the Economic Outlook 2023: Inflation Cooling, Economies Slowing). Slowing external demand is also likely to spill-over into manufacturing and private investment weakness. As external sector growth wanes, we think a gear-up in policy support will be crucial in 2023 to offset these strains (Figure 6)
Both fiscal and monetary policy levers can afford to remain accommodative. China’s CPI inflation has been contained between 2-3%, with core CPI inflation staying under 1% for most of 2022 (Figure 5). Most factors that underpin the low inflation rate, such as a stable currency and limited feed-through of higher global commodity prices, are expected to continue to depress domestic headline price pressure in 2023.
Regarding fiscal policy, infrastructure investment will likely do the heavy lifting, while stimulatory efforts on the property sector, and measures to boost domestic consumption should also support a bottoming out of growth over 2023.
Figure 5: China CPI has been tame, allowing for monetary policy space |
Figure 6: As external growth slows in 2023, we expect policy support for fixed capital formation and domestic consumption to step up |
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Source: CEIC, NBS |
Source: CEIC, NBS |
India: A Bright Spot in Asia
India’s economic growth has been resilient in 2022. The IMF is expecting India’s real GDP to have grown by a strong 6.8% in 2022. As the underlying growth drivers should remain intact, we believe India will continue to be one of the fastest growing major economies in the world in 2023. Importantly, India’s output is likely to see a smaller impact from slowing demand from advanced markets, as domestic consumption and investment are the bigger contributors to growth.
Recent data on private consumption and manufacturing activities is showing sustained strong momentum. Retail footfalls are higher than pre-pandemic levels, and consumer confidence is recovering well (Figure 7). Activity in the manufacturing and services sectors is expanding, as shown by the PMIs (Figure 8). Alternative activity indicators such as electricity generation and freight traffic are above pre-pandemic levels as well.
Figure 7: RBI Consumer Confidence survey showing a robust upward trend |
Figure 8: India PMIs are in the expansionary territory |
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Source: RBI, CEIC |
Source: S&P Global, CEIC |
Investments into India have been rising, as India is one of the beneficiaries of the restructuring of supply chains in Asia. Favourable demographics and improving government policies are other medium-term drivers for business growth. India’s fast-growing start-ups and innovation sectors are attracting significant domestic and foreign investment; in particular, in the areas of digitisation, fintech, Gen Z consumption trends and green transition (solar, renewables, electric vehicles etc.). Beyond these new economy sectors, India is also gaining market share in key export sectors such as IT services, pharmaceuticals, and electronics manufacturing.
Improving investment activity is reflected in the robust and broad-based credit growth in 2022 (Figure 9) as well as the government’s thrust on capital spending and infrastructure. Corporate balance sheets are healthy after the asset quality review in 2015, meaning that the corporate sector can lever up capital expenditure (capex). The government is also incentivising investment through the “Production Linked Incentive Schemes”[3] especially in the electronics and IT sectors. Finally, public sector focus on capex has intensified. The Government of India budgeted a 35% increase in capex for FY2022-23 and has been monitoring the capex targets for the major central public sector enterprises (CPSEs)[4] more closely.
Turning to inflation, headline CPI inflation in India has been moderating for a few months, while core CPI has remained stable at around 6% post-pandemic (Figure 10). CPI inflation is expected to stabilise within the RBI’s target band of 2-6%, as global commodity prices ease, and with food inflation already softening[5]. Supportive policy measures have helped contain some of the inflation pressures in a timely manner. For example, the government’s decision to reduce fuel excise duty and the Reserve Bank of India’s intervention to cushion the rupee’s depreciation helped limit rises in imported fuel prices.
We believe that a strong domestic consumption recovery, the government’s focus on increasing public capex and improving productivity from investment in innovative sectors, will be the main drivers for the Indian economy in 2023.
Figure 9: Bank credit growth |
Figure 10: India CPI is moderating to RBI’s comfort range |
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Source: CEIC, RBI bulletin |
Source: CEIC, RBI |
Take-aways
China and India are at different stages of economic recovery from the impacts of the COVID-pandemic. China should benefit from its exit from zero-COVID policies in 2023. This will be reflected in higher consumption demand, at a time when the government is also expected to gear up policy support through infrastructure spend to offset some of the drag from weaker global growth.
India should be relatively shielded from the global headwinds. In fact, as global growth slows, an easing in commodity prices as well as lower currency depreciation pressures, could mean that monetary policy in India can turn accommodative sooner to support growth. In India, the government’s focus on boosting capex and increasing business investment will complement the robust domestic consumption momentum in 2023.
[1] SCMP, China’s top Covid-19 official signals new phase of controls, December 1, 2022
[2] Bloomberg news, China’s 16-Point Plan to Rescue Its Ailing Property Sector, November 13, 2022
[3] Ministry of Electronics & Information Technology, Production Linked Incentive Scheme
[4] Business Standard, Capex by CPSEs accelerate to 60% of annual target, December 10, 2022
[5] RBI resolution of the monetary policy committee (MPC) December 5-7, 2022
