Growth Differential Expected To Peak In Q2 2023, FX Markets Pricing In Better Outlook

China data was uniformly better than expected, Q4 GDP was flat against a -1.1% forecast, which left y/y growth at 2.9%, also above expectations, but down from the 3.9% pace seen in Q3. IP (+1.3% y/y, versus 0.1% forecast) and retail sales (-1.8% y/y, -9.0% forecast) also comfortably beat expectations. Both measures are also above trough points in recent years (which coincided with previous Covid waves).

• FAI and property investment were both a touch better than expected, but property sales remained very depressed at -28.3%, little changed from November.
• The consensus expectation is growth momentum will improve from here, see the chart below, with the dashed lines the consensus y/y projections for 2023. We are expected to be back above 6% by Q2, although part of this reflects base effects versus 2022.
• This is well above projected pace for other major economies/regions. EU y/y GDP growth is expected to be negative in Q2 (-0.3%) and modestly positive for the US (+0.8%).

Fig 1: China GDP Momentum Projected To Improve Through 2023

Source: MNI - Market News/Bloomberg

• Still, the overall projection for 2023 growth is unchanged at 4.8% for the consensus. This is also consistent with a steady J.P. Morgan Growth Forecast Revision Index (FRI) over recent weeks.
• Forecasters may want to see how the economy unfolds post the recent Covid waves and see genuine improvement in underlying activity before upgrading 2023 aggregate forecasts.
• This factor, coupled with the fact the market has been trading off the re-opening theme for some time may explain today's muted reaction in the Asian FX space to the better than expected data outcomes.
• The second chart below shows the J.P. Morgan ADXY Y/Y momentum is already on the improve at this stage, so some of the re-opening story is already priced to a degree.

Fig 2: ADXY Y/Y & China Industrial Production Growth

MNI: J.P. Morgan/MNI - Market News/Bloomberg