China's economy is poised for a ‘burst' of economic activity

The abrupt end of China's Covid controls might hamper growth in the very short term, but the reopening is expected to result in a sharp rebound in the coming months. Our economists recently raised their full-year GDP growth forecast for 2023 to 5.2% from 4.5% because of China's earlier-than-expected reopening. Daily Covid cases appear to have already peaked, based on news reports as well as other data points such as internet search frequency for virus-related topics. There's also evidence that people are moving more freely around the country and across borders. Officials in China appear to be focused on reviving economic activity this year. “China's abrupt shift on Covid policy has led to a large wave of infections in recent weeks and a drop in mobility and economic activity,” Andrew Tilton, our chief Asia Pacific economist, wrote in a recent report. However, “reopening should result in a burst of growth over the coming year and benefit regional economies, with Hong Kong and Thailand likely to see significant boosts from mainland tourists,” he says.

Tilton doesn't expect reopening to result in a significant inflation problem for China. As some other countries emerged from restrictions, supply-side disruptions, stimulative policies and an abrupt rebound in demand led to large inflation surprises in 2022, but not all of those factors are present in China. While our economists expect China's core CPI inflation to accelerate by more than a percentage point (to 1.9% year-over-year by the fourth quarter) this year, they don't think it will be a major constraint on the policies of the People's Bank of China in 2023.

Will a warm winter cool energy prices?

The winter that wasn't. Mild weather is driving down demand for energy as Europe has one of its warmest winters on record. In the past two weeks, the price of natural gas on both sides of the Atlantic has dropped by around 20%, dragging down oil and grains as well. However strategists in Goldman Sachs Research are still bullish on oil and commodities this year as China reopens its economy faster than expected.

“Markets are priced for a 2023 recession, positioned firmly risk off and ill-prepared for a Chinese reopening, fewer gas constraints on European industry and a more resilient than expected U.S. economy,” Jeff Currie, the global head of commodities research in GS Research, wrote in the team's report. Goldman Sachs Research estimates that a faster reopening in China could add $5 per barrel to the oil price forecast in 2023. Our strategists expect Brent crude to rise to $105 in the next 12 months from $80 per barrel now.