China was the global economic story in the first quarter of 2023, with clear signs of rebound across multiple metrics. The most significant progress came in housing and private consumption. As the nation moved into April, it was faced with major challenges from persistent trade conflicts with the United States. Danske Bank’s FX analysts provided insights into these developments, highlighting both the progress and the hurdles that lie ahead for China’s economy.
In Q1 of 2023, China was starting to bounce back. Higher economic indicators, including an impressive comeback in housing and consumer spending. Analysts noted that these sectors had begun to show green shoots, signaling a potential turnaround after a prolonged period of stagnation. Despite this promising start to the year, the situation quickly became more complicated when trade tensions escalated in April.
China has long been embroiled in a trade war with the United States, with both nations imposing tariffs on each other’s goods. These recent escalations have only poured fuel on these flames, as the U.S. readies to impose a new round of tech sanctions on China. In response, China has retaliated by imposing restrictions on rare earth exports, crucial components in various high-tech industries. This tit-for-tat approach further emphasizes the competitive tilt of the U.S.-China relationship.
Danske Bank’s FX analysts acknowledged the mixed signals from China’s economic landscape. They stressed the strength of recovery in housing and private consumption. They emphasized that there is much more work to be done to entrench these gains. Analysts indicated that the government has pushed forward stimulus measures aimed at counteracting the effects of tariffs on trade, with expectations for growth at 4.7% in 2025 and 4.8% in 2026.
“Still, we leave our growth outlook unchanged as our medium-term scenario for the trade war remains the same with an end game of 40% tariffs on Chinese goods following a long bumpy road of trade talks. Stimulus was pushed forward as expected to counteract tariff effect. We continue to see growth at 4.7% in 2025 and 4.8% in 2026.” – Danske Bank’s FX analysts
As the trade war shows no signs of abating, analysts expect that over the coming months, China may experience a temporary uptick in economic activity due to front-loading of exports during a brief trade truce. They warn this growth is likely unsustainable, projecting a calming of activity levels after the truce.
“Over the coming months we expect a pick-up in activity due to front loading of exports during the 90-day trade truce but see activity moderating again after that. Housing and private consumption have improved but lots of work remain to get the two sectors on stronger footing. A growing number of tech milestones have boosted confidence.” – Danske Bank’s FX analysts
Beyond its trade struggles, China is burdened by a host of structural problems choking its runaway growth. Overcapacity in certain industries poses a significant barrier, as does an industrial policy that many analysts argue requires reform. These factors contribute to a complex economic environment where growth is achievable but fraught with difficulties.
The geopolitical environment makes it even more difficult for China. The country’s stance on the Ukraine war has attracted international scrutiny, adding another layer of tension to its relationships with Western nations. The ongoing rivalry between the U.S. and China appears set to persist, affecting not only trade but global supply chains and economic stability.