A Strong March Leads to a Surge in Chinese GDP in Q1 2023

Jacob Hess

April 18, 2023

• China
• GDP

After a disappointing start to the first quarter, it appears that a strong March in China helped the economy bounce back strongly from a weak 2022. GDP grew 2.2% QoQ and 4.5% YoY in Q1 2023, beating consensus expectations that were heavily influenced by the frailty of the January/February numbers. In particular, China saw its industry grow 3.0% YoY, up slightly from 2.7% YoY in Q4 2022. This includes manufacturing growth of 2.9% YoY and mining growth of 3.2% YoY. The GDP beat was not a result of better factory activity. Instead, China’s services sector finally experienced its resurgence from the harsh restrictions of the last two years. Services grew a robust 5.4% YoY, up significantly from 2.3% YoY in Q4. The annual improvement in the service industry production index in March was a sharp 9.2% YoY. It appears that Chinese consumers got up and out into services businesses as spending there finally increased as it was expected to for some time. Tourism has especially been a boon for growth as domestic and international travel has recovered in Q1. One key area to note is real estate. The struggling sector has suffered from weak financial conditions and thus weak investment. It appears that the trend will continue in 2023. Real estate activity was down -5.8% YoY.

GDP received a huge boost from consumer spending in Q1 which was bolstered by surge in retail sales in March. Sales jumped 10.6% YoY which is a sharp acceleration from February's growth of 3.5% YoY. There was growth in almost every segment of sales, but non-durable goods categories saw the largest expansion. Food sales surged 26.3% YoY on the month alongside other non-durable goods markups including clothing (17.7% YoY) and entertainment goods (15.8% YoY). Durable goods categories, especially related to real estate, were the weakest. Building materials sales were down -4.7% YoY, and household appliance sales fell -1.4% YoY. These trends confirm that there are two major factors impacting the Chinese economy’s path. The first is a strong reopening catalyst that is sparking positive consumption developments, something that was largely expected by analysts when putting together growth estimates. The second is shaky credit conditions that are restricting both businesses’ and individuals’ abilities to make big purchases. Fixed asset investment grew 5.1% YoY in March which was a -0.4 ppt decline from February growth. Private investment was up only 0.6% YoY. Fiscal and monetary policy actions to address credit concerns are increasingly being considered in 2023.

Finally, we have a vigorous improvement in Chinese industrial production in March, up 9.3% MoM and 3.9% YoY in March (production grew 2.4% YoY in February). Manufacturing production was up 4.2% YoY, and as discussed before, was up 2.9% YoY in the first quarter. The two big areas of growth were in the auto manufacturing industry, up 13.5% YoY, and the electrical machinery manufacturing industry, up 16.9% YoY. Both are seeing booms from Chinese investment in green energy industries which has been a new goal of the Xi administration’s plan to dominate the space as it escalates competition with the US and Europe. New energy vehicle production surged 33.3% YoY, and solar cell production jumped even more, up 69.7% YoY. This will continue to be a trend driving growth in China for years to come.

China’s economy looks to be back. The Asian giant’s resurgence from COVID is being fueled by its citizens finally going out and spending again, sparking a much-needed boom in the services sector. Businesses are starting to feel that they have room to stretch their legs and expand again, especially in industries that are favored by Xi’s focus on high-tech manufacturing and green energy which aligns with China’s geopolitical struggle with the US and Europe. For now, though, weakness in those two regions is keeping Chinese export growth limited as they maintain the status of primary trading partners. Additionally, fragile financial conditions keep a solid ceiling on Chinese growth as debt concerns first sparked by the real estate sector persist. As reopening effects fade and the boom in consumption stabilizes, it seems that the economy will have to be driven by stimulating monetary and fiscal policies to sustain the strong performance that we have seen in Q1 2023. Nevertheless, for now it seems like the world’s Asian giant is back.