Analysts stay upbeat on long-term economic prospects

The new wave of COVID-19 infections and tightened restrictions have clouded China's economic outlook, prompting more economists to revise down their short-term growth forecasts for the world's second-largest economy.

But most analysts expect China's growth momentum to pick up again in the fourth quarter and remain upbeat about the longer-term prospects as the economic recovery will benefit from stronger policy support.

Meanwhile, economists called for more policy attention to consumer confidence, the service sector and the job market, which remained fragile and have not fully recovered to their pre-COVID levels.

US bank Goldman Sachs has cut its quarterly growth forecast for China to 2.3 percent in the third quarter from its earlier prediction of 5.8 percent and cut its full-year projection to 8.3 percent from 8.6 percent. JP Morgan also reduced its forecast for China's year-on-year GDP growth in the third quarter to 6.7 percent from 7.4 percent and reduced its full-year projection to 8.9 percent from 9.1 percent.

Despite the downgrades, most economists say that China is capable of maintaining an annual growth rate of above 8 percent this year, higher than the government's annual target of more than 6 percent. 

Economists said the impact of the COVID resurgence could be limited if swift government action brings it under control in a short period of time and greater monetary and fiscal support could effectively ease the rising growth pressure.

Shao Yu, chief economist at Shanghai-listed Orient Securities, said that the slowdown caused by the COVID-19 resurgence should be within the expectations of Chinese policymakers or at a tolerable level, and they are likely to further fine-tune macro policies to lend more support to the economy, although drastic easing is unlikely.

The local outbreaks may suppress economic growth by bringing offline service activities to a transitory standstill in the affected areas, but the impact will remain limited if the resurgence can be brought under control this month and policy support is stepped up to offset the downside pressure, Shao said.

Analysts with Standard Chartered said that stringent control measures, a high vaccination rate and more experience in maintaining business continuity should limit the impact of a new COVID resurgence in China.

"In comparison, in case of a mild COVID outbreak with effective containment of the virus and only a short period of lockdown, the negative impact is likely to be 1.2 to 1.7 percent of quarterly GDP, or 0.3 to 0.4 percent of annual GDP. Under this scenario, the lost output could be fully recovered in the subsequent quarter depending on the mix of domestic policy settings and global demand," they said in a research note.

The latest national economic data indicates that China's key growth drivers, including exports, have shown signs of weakening amid easing global demand. The rising headwinds have also triggered calls for more policy attention to boost domestic consumption and to facilitate a stronger recovery of the services sector, which matters significantly for China's job market.

In contrast to the strong rebound of industrial production and exports in the first half of the year, the trend of consumption recovery in China, especially services, remains below the pre-pandemic level, analysts said.

Wang Jingwen, a macroeconomic researcher with China Minsheng Bank, said the services sector, including long-distance transport, hospitality, catering, offline retail, sports and entertainment could bear the brunt from the resurgence in COVID-19 cases.

This could put some pressure on achieving the government's employment goals as well as China's recovery in consumption, a key pillar of economic growth amid softening prospects for exports, Wang said.