Salus Private Wealth Logo

Latest News

China’s economic rebound lowers the odds of a global recession

Why markets are optimistic

.

China seems to be well on its way to our 5.3 per cent growth forecast for 2023, which is slightly higher than consensus (5.1 per cent as I write this) and higher than our earlier estimate of 4.5 per cent back in 2022.

We had expected China’s COVID exit strategy to be bumpy and gradual. It turned out be even bumpier and not at all gradual after the country’s sudden reversal on its zero-COVID policy. China’s Center for Disease Control and Prevention estimates that 80 per cent of the population has already been infected by COVID, so the nation may have already passed peak infection levels and achieved herd immunity, lowering the hurdles for further economic growth this year. This will likely have a positive impact not just on China but globally.

That said, recent surges in the global equity and commodity markets suggest that some may be overly optimistic about the impact China’s rebound will have on the rest of the world.

Why the impact may not meet expectations

What’s causing this rosy outlook? Drawing upon experiences in the United States and other developed countries, some media and market watchers are anticipating what they call “revenge spending”—pent-up demand and accumulated savings after three years of COVID lockdowns leading to a tide of Chinese consumer spending that will lift all boats. Some have estimated that as much as RMB 4 trillion to 6 trillion of excess savings accumulated over the past three years may flood the world’s markets.

In our opinion, the actual range is substantial but more modest. Depending on different assumptions of the saving trend, we believe that China’s excess savings over the past three years could be in the range of RMB 1.5 trillion to 4 trillion, but closer to the lower end—roughly RMB 2 trillion, or AUD 431 billion.

Several factors play into our more moderate estimate of the impact:

  • Much of the savings over the past three years came from fewer home purchases and from redemptions of investments during a period of market turmoil—not the kind of savings that people would readily use for consumer goods and services.
  • Unlike consumers in developed markets, Chinese households didn’t experience a persistent supply shortage of goods. Further, auto sales have been largely front-loaded in the second half of 2022, thanks to tax incentives. So there may be less pent-up demand than some would expect.
  • Household fundamentals are also much weaker than in developed markets because of surging household debt over the past decade, limited fiscal transfer during the pandemic, three years of low income growth and high unemployment, and negative wealth effects from the sharp decline in housing prices last year.
  • Most of the excess savings are held by wealthy households, who have less propensity to spend than the less affluent, at least in proportion to their assets. For the less wealthy, the precautionary saving incentive is unlikely to fade immediately given the lagging recovery in labor markets, the flimsy social safety net, and the uncertain long-term outlook.
  • Chinese household consumption accounts for only 38 per cent of the country’s GDP; in comparison, in the United States, it’s roughly 70 per cent of GDP. Increasing China’s private consumption by 10 per cent translates to a 4 per cent increase in its GDP. So the impact will not be as great for China as it was for the U.S. when it went through its post-lockdown bounce.
Who would benefit the most from Chinese consumers

Any immediate rebound in consumption could come from the well-off in China more than the common laborer. When the affluent do spend, the immediate beneficiaries will likely be the makers of luxury goods, the tourism industry, and educational services.

In pre-COVID 2019, Chinese travelers accounted for roughly 20 per cent of all tourism spending, according to data from the World Trade Organisation. If that type of spending pattern resumes for 2023, the economies most likely to benefit are those in Asia. (Nine of the top 10 countries most visited by Chinese tourists in 2019 were in Asia).

Educational services—primarily overseas study at universities—will also likely rebound, mainly in Australia, the United Kingdom, and the United States.

A rebound in China’s economy, particularly for travel, will also benefit exporters of commodities such as oil and natural gas. However, this also means higher inflationary pressures that present a challenge for central banks.

Why we might just avoid a global recession

China already accounts for about 20 per cent of the global economy. Any rebound in its demand for imported goods and services will have a positive impact, if not necessarily of the magnitude others might expect.

Last year, we estimated that the likelihood of a global recession in 2023 was roughly 50/50. With China rebounding at our projected rate, we believe that chance is now less than 50 per cent. (The World Bank defines a global recession as an annual contraction in world real per capita GDP accompanied by a broad decline in various other measures of global economic activity.)

Why our outlook for China’s long-term growth is guarded

Despite the cyclical upturn, our long-term outlook for China is cautious. As we pointed out in our 2021 paper, China has several structural challenges—among them, an aging population, fading globalisation, and a retreating private sector—and that hasn’t changed. China’s population fell in 2022 for the first time since 1961. China might grow old before it becomes rich.

Over the long run, China’s annual GDP growth may fall to the 3 per cent‒4 per cent range or lower—still healthy and more sustainable, but not quite the economic engine that has helped boost the global economy in recent decades.

For now, China may provide just enough impetus to keep the world economy from dipping into a recession.

 

 

 

Qian Wang
Chief Economist, Asia-Pacific
Head of the Vanguard Capital Markets Model
vanguard.com.au

Latest News

Louise Laing

Louise founded Salus Private Wealth to offer high quality personal advice to clients who want to work closely with an adviser for the long term. Her philosophy that understanding each individual and their motivations and needs is key to an enduring and successful financial planning relationship is at the heart of the business.

She first engaged the services of a financial adviser herself when she was in her early 20s (long before becoming one) and believes the non-judgemental support and education about her position and options provided at this early stage has allowed her to make confident decisions in different aspects of life since then.

This confidence and positivity in making choices, financial or not, is what she wants to give to her clients.

Superannuation & Retirement

Superannuation is one of the largest and longest duration investments most people in Australia have, making it a critical part of long-term planning even if retirement feels like a distant objective. For those in the lead into retirement, we design strategies so you have peace of mind that when you start to draw on your retirement savings, you have liquidity and stability to support that.

Legislation and rules are changed regularly, so advice can help you take advantage of opportunities to build for the future. We are authorised to provide advice on and to SMSFs.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Insurance

Protecting your wealth, lifestyle and family is high on the priority list for many clients and this is an area of advice need that can change very quickly. Ensuring you have the cover you need can give peace of mind that what’s important is taken care of in the event of illness, injury and death, but we also make sure over time you are not paying for cover you no longer need.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Estate Planning

While talking about death doesn’t seem like a particularly appealing prospect, it’s a topic we see as a vital part of financial planning. Importantly, it’s a topic for every adult, regardless of their stage in life. Without a proper estate plan assets may not be passed where you’d like them to go, family conflict can ensue, and in the event you lose capacity there may not be an authority in place for the person you would choose to make those decisions for you to do so. While it can be an uncomfortable subject, we are experienced in facilitating these conversations as part of our advice process.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Strategic Debt & Cashflow

Managing debt efficiently can have a material impact on your financial wellbeing and lifestyle. Having a solid plan to understand where your money goes and manage cashflow and debt can eliminate stress and set you on a positive path toward achieving your goals.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Investments

Once we have a clear understanding of what we are aiming for and how you feel about taking on investment risk, we can help direct your funds into appropriate investments to meet your goals. This includes recommending the investment structure, consideration of tax implications, asset types, and putting together a suitable blend for you. You will have transparency of and access to view your investments, providing security.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Aged Care

Aged care needs can arise suddenly. The complexity of managing this can be a significant challenge at a time when your focus should be on the person requiring care. We can assess the alternative funding options to ensure you make an informed choice in the best interests of the person requiring care.

Contact us today to discuss how we can work together: (02) 8044 3057 or email us at info@saluspw.com.au

Tax Diary

General Calculators

 

Financial Videos

Secure File Transfer

Secure File Transfer is a facility that allows the safe and secure exchange of confidential files or documents between you and us.

Email is very convenient in our business world, there is no doubting that. However email messages and attachments can be intercepted by third parties, putting your privacy and identity at risk if used to send confidential files or documents. Secure File Transfer eliminates this risk.

Login to Secure File Transfer, or contact us if you require a username and password.

General Disclaimer

Website Disclaimer

The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth (Corporate Authorised Representative No. 1305571) and all our advisers are Authorised Representatives of Finchley & Kent Pty Ltd, Australian Financial Services Licence No. 555169, ABN 50 673 291 079, and has its registered office at Level 63, 25 Martin Place, Sydney NSW 2000.

Finchley & Kent Pty Ltd Australian Financial Services Licence applies to financial products only. Please note that Property Investment, Tax & Accounting, Mortgages & Finance are not considered to be financial products.

Disclaimer: The information contained within the website is of a general nature only. Whilst every care has been taken to ensure the accuracy of the material, The Trustee for Laing Weaver Family Trust T/A Salus Private Wealth and Finchley & Kent Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.