China Headed for Recession: Pantheon Macroeconomics

  • Beijing another step closer to full lockdown
  • Pantheon Macroeconomics see recession in China
  • 'True' GDP growth to barely be above 2.0% in 2022
  • USD/CNY to hit 6.8 by year end

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With another Chinese mega city approaching a full scale lockdown economists are increasingly of the view a substantial slowdown in the world's second largest economy is under way.

It is reported Tuesday that Beijing has expanded its Covid-19 mass testing from one district this week to the majority of the city's 22 million residents, suggesting an imminent lockdown similar to Shanghai’s looms.

Economists at independent research consultancy Pantheon Macroeconomics warn a sharp Covid-induced slowdown is now well underway in China as a result of the stubborn adherence to zero-Covid policies.

"We think the official data overstate the strength of growth, and in any event capture only the beginnings of the zero-Covid induced slowdown," says Craig Botham, Chief China Economist at Pantheon Macroeconomics.

The decision to expand testing in Beijing comes after authorities reported just 33 new locally transmitted cases, by contrast similar measures were only implemented in Shanghai when over 1000 cases were identified.

If anything, this could suggest authorities in Beijing are pursuing the zero Covid approach with additional zeal.

Pantheon Macroeconomics says for China to reach its 5.5% growth target this year "at least one key policy goal to be dropped: either debt will need to rise significantly as a share of GDP, or zeroCovid will have to be abandoned," says Botham.

"All signs point to the former, with Shanghai doubling down on restrictions in April, and Covid cases now on the rise in Beijing," he adds.

The Chinese economy grew 4% year on year over the last three months of 2021, down from 4.9% in the previous quarter.

Looking ahead, the new median forecast among nine financial firms tracked by CNBC expects Chinese GDP growth of 4.5% for the full year.

Pantheon Macroeconomics however warned the Chinese economy was headed for recession.

"We expect a further slowdown of growth in Q2, amounting to a recession, on our estimate of GDP," says Botham.

Chinese GDP estimates


Pantheon Economics forecast full-year "true" 2022 growth of 2.5% and 5.0% in 2023, while the official figures are to reflect 4.2% and 5.0% respectively.

Ernan Cui at Gavekal Dragonomics, a Beijing consultancy, estimated that almost three-quarters of China’s 100 largest cities, accounting for more than half of national GDP, are enforcing Covid-related restrictions.

As the economy comes under intense pressure so too has the currency.

The renminbi has over recent trading days suffered an abrupt 3% deprecation in the to 6.55 versus the dollar in recent days.

"We had warned of a turbulent Q2 for the renminbi, and the currency has duly delivered, depreciating 3.2% against the dollar since the start
of April, the largest move since 2018. Pressure continues to build on the capital flows front," says Botham.

He says the interest rate differential between China and the U.S., as measured by three- and ten-year government bond yields, has turned negative for the first time since the Global Financial Crisis.

"Trade flows are set to erode further, and will not provide the same boost as in 2021," says Botham.

Pantheon Macroeconomics forecast the RMB to hit 6.8 to the dollar by year-end, with risks chiefly to the downside.

CNY exchange rate forecast Pantheon