Geopolitical tensions and the economic spillover of efforts to combat Covid-19 have resulted in a dim outlook for growth in China.
Éric Morin, senior analyst at CIBC Asset Management, said his outlook on China for the next 12 months is bearish for several reasons.
First, the ongoing effects of the pandemic. Last month, Moody’s Investors Service cut its forecast for China’s GDP growth in 2022 from 5.2% to 4.5%, citing the economic effect of its latest Covid-19 lockdowns.
While Morin said it’s likely that China will eventually abandon its zero-Covid policy, the country will remain in a vulnerable position. The lower efficacy of the Chinese vaccine, a near-zero rate of natural immunity from past infection and a low vaccination rate among senior citizens are all contributing factors, he said.
“Living with the virus would result in weakness for services, or would at least cap demand for services,” Morin said.
Further, Morin said consumption fundamentals were already weak in China prior to omicron, and he doesn’t see that changing anytime soon.
Foreign demand is also a contributing factor. Morin said since the start of the pandemic, China’s external demand has been exceptionally strong, which has been a “key tailwind for the Chinese economy.” However, with central banks in developed markets hiking their rates, the strength of external demand will likely recede, reversing a previous tailwind into a headwind, Morin said.
Another concern is housing. Historically, Morin said housing and infrastructure have been key drivers of growth in China. However, “policymakers in China don’t have the appetite to generate a housing-led recovery” due to an abundance of supply outside its larger cities, he said.
In addition, Morin said China is seeing a decline of its working-age population as the median age approaches 40.
He also doesn’t expect large-scale government stimulus in China, leaving limited fiscal leeway.
“The country has run out of low-hanging fruit options regarding the selection of infrastructure projects that are both profitable and easy to implement quickly,” Morin said.
Morin expects a stimulus of 1-1.5% of GDP, which he said is positive but won’t boost global growth in a “meaningful manner.”
This limited stimulus is likely to target decarbonization projects, such as solar panels, the electricity grid and charging stations for electric vehicles, which will be good for copper producers.
The consumer discretionary sector will suffer, especially luxury brands, he said.
Regardless, Morin said “the Chinese outlook is not compatible with a strong acceleration of growth in 2023.”
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