China posted Q1 2023 GDP growth of 4.5%, above the 4% consensus, marking the highest growth since Q1 2022. Q-o-Q, the economy grew 2.2%. Although the recovery appears uneven, the Chinese economy is well on track to reach Beijing’s 5% objective.

China’s Q1 GDP expanded 4.5% y-o-y, above the 4% consensus. On a q-o-q basis, the economy grew at 2.2% compared to 0.6% in Q4 2022. The number was still short of the Chinese government’s 5% target, but the first two months of the year were still impacted by the COVID-related restrictions.

Domestic consumption has accelerated, with March retail sales rising 10.6% y-o-y, compared to 3.5% in the January and February. Meanwhile, industrial production, with a 3.9% y-o-y increase, showed an improvement vs. 2.4% in Jan-Feb, although slightly below the 4% consensus, while fixed assets investments increased by 5.1% y-o-y, also lower than the 5.5% posted in the first two months of the year. Private investment rose by a just 0.6%.  The property market has yet to recover and investment in property declined 5.8% in Q1.

In combination, these Q1 numbers suggest an uneven recovery. As expected, domestic consumption and services have been the first sectors to rebound while pent-up demand for manufacturing goods and private investment will take time to recover. A low CPI (0.7% in March) indicates that business and consumer confidence may not be as high as the macro numbers suggest and Bank of China is likely to keep an accommodative monetary policy. Exports posted a surprising 14.8% y-o-y increase in March driven by shipments to ASEAN and supply chain improvements. However, the outlook for exports remains uncertain for the rest of the year, in line with a weak global economy.

It will also take time for the property market to recover.  Average new home prices in China's 70 major cities dropped by 0.8% y-o-y in March 2023 but rose by 0.5% m-o-m, after a 0.3% increase in February, suggesting a stabilisation of the market. As expected, the recovery of the property market will be gradual and most likely skewed towards H2.

Project Blue maintains its outlook for 5.5% GDP growth in 2023, driven by domestic consumption with the economy gaining momentum as the year progresses. Consumer and business confidence, recently undermined by Beijing’s ‘zero-COVID’ policy, remain a key uncertainty but the Chinese government is likely to keep its pro-growth stance, using both monetary and fiscal tools to reach its 2023 target.