China: Domestic and External Conditions are Leading to a Weakened Economic Outlook

Economic activity in China continues to track the ups and downs of the pandemic—outbreaks and growth slowdowns have been followed by uneven recoveries. Real GDP growth is projected to reach 2.7 percent this year, before recovering to 4.3 percent in 2023, amid a reopening of the economy, according to Navigating Uncertainty, the latest China Economic Update released today by the World Bank.

“Continued adaptation of China’s COVID-19 policy will be crucial, both to mitigate public health risks and to minimize further economic disruption,” said Mara Warwick, World Bank Country Director for China, Mongolia and Korea. “Accelerated efforts on public health preparedness, including efforts to increase vaccinations especially among high-risk groups, could enable a safer and less disruptive re-opening.”

Public health measures could include focused efforts to increase vaccination rates among vulnerable groups, rollout of a booster campaign, increased access to effective COVID-19 treatments, and efficient use of limited hospital capacity for severe cases.

China’s growth outlook is subject to significant risks, stemming from the uncertain trajectory of the pandemic, of how policies evolve in response to the COVID-19 situation, and the behavioral responses of households and businesses. Persistent stress in the real estate sector could have wider macroeconomic and financial spillovers. Risks related to climate change are growing, as demonstrated by this year’s extreme weather patterns and the resulting disruption to economic activity. Externally, risks emanate from highly uncertain global growth prospects, greater-than-expected tightening in financial conditions, and heightened geopolitical tensions.

“Continued macroeconomic policy support will be needed, as growth is expected to remain below potential and the global environment is weakening,” said Elitza Mileva, World Bank Lead Economist for China. “Directing fiscal resources towards social spending and green investment would not only support short-term demand but also contribute to more inclusive and sustainable growth in the medium term.” China has adequate fiscal policy space, especially at the central level, that could be deployed to bolster a stronger recovery, alongside easing of COVID-related public health measures.

Increasing youth unemployment rates have highlighted the emergence of another pressing challenge for policymakers. Employment subsidies and public works programs have provided near-term support to youth employment. The report argues in a special topic section that these short-term measures could be complemented with structural measures to strengthen the skillset of youth, improve labor market mobility, address information asymmetries, and strengthen labor market statistics.