China is heading towards a recession like Japan? Macquarie says the worst is behind us

BEIJING — China’s economic recovery from the pandemic is set to widen, meaning the country hasn’t headed into a Japan-style recession just yet, according to Macquarie’s chief China economist Larry Hu.

China’s recent economic data has largely disappointed investors hoping for a sharp recovery in the world’s second largest economy after the end of Covid controls in December. Youth unemployment hit a record high of over 20% in April.

In a report released on Friday, Hu attributed the recent economic slowdown to a “premature” withdrawal of policy support after better-than-expected first-quarter data.

Going forward, policymakers are expected to remain accommodative given the lack of inflation and high youth unemployment – with more urgency to ease as year-on-year comparisons eased in the third quarter.

“As the recovery widens over time, the economy will enter another upward spiral with stronger demand and better confidence,” Hu said.

At a meeting on Friday, the State Council, China’s top executive body, called for improving the business environment and removing domestic barriers to market access. According to state media. State media reported that the country will also extend purchase incentives for new energy vehicles as a way to boost consumption.

The meeting, led by Premier Li Qiang, noted that the foundation of China’s economic recovery has not yet consolidated.

“While the worst is behind us, the recovery is far from self-sustaining,” said Macquarie’s Hu. “Companies are reluctant to hire because of weak consumer demand, and consumers are reluctant to spend because of a weak labor market.”

“Such a self-fulfilling downward spiral bears some resemblance to Japan’s lost decades,” he said.

The Japanese economy grew rapidly in the 1970s and 1980s, but stagnated when the bubble burst in the 1990s and stock and real estate prices collapsed. Japan was the second largest economy in the world for decades, until it was overtaken by China in 2010.

“The lack of self-recovery in China today is basically a cyclical phenomenon, not a structural one,” Hu said. “History suggests that anxiety about ‘Japan’ will subside once the recovery becomes more firmly established.”

He noted that previous concerns about economic recovery in 2012, 2016 and 2019 all led to market corrections in the second quarter of those years – before the MSCI China index rebounded.

The iShares MSCI China ETF is down about 4% so far this year.

But with only four months left in the books after China’s Lunar New Year holiday, it’s still hard to predict long-term trends.

A case in point is China’s huge real estate sector, where the nascent recovery appears to have stalled.

Extrapolating from sales data in the first quarter, one might expect new home sales to rise 10% or more this year, Hu said. “Extrapolating from sales data in the second quarter, one might expect them to decline by 10% or more.”

“The reality may be somewhere in between.”