Goldman cuts China GDP target for 2022 — and exports aren't the problem

BEIJING — Goldman Sachs cut its 2022 forecast for China economic growth Tuesday in expectation of increased restrictions on business activity aimed at containing the omicron Covid variant.

In the last few days, China has reported pockets of omicron cases in Tianjin city and Anyang, Henan province, which have prompted at least partial lockdowns. Xi’an, a major city in central China, has been locked down since late December to control a Covid outbreak that authorities say is not linked to omicron.

“In light of the latest Covid developments — in particular, the likely higher average level of restriction (and thus economic cost) to contain the more infectious Omicron variant — we are revising down our 2022 growth forecast to 4.3%, from 4.8% previously,” Goldman Sachs analysts Hui Shan and a team wrote in a report late Tuesday.

Consumption will likely be affected the most, while exports less so, the analysts said, as they assume limited disruptions to supply chains. They expect government policy easing to offset half of the drag from Covid restrictions, and assume the negative impact will be concentrated in the first quarter.

China’s economy contracted in the first quarter of 2020 as more than half the country shut down during the initial coronavirus outbreak in the country. But the temporary closures overlapped with the Lunar New Year holiday, when businesses can be closed for a month.

By the second quarter of 2020, the virus was under control domestically and the economy returned to growth.

Nearly two years later, local authorities are increasing travel restrictions and other measures despite a low number of cases — relative to the initial outbreak and a smaller one in the summer of 2021, the Goldman analysts said.

“Containing the domestic Covid situation remains top priority for local officials,” the report said.

Maintaining stability is key, China’s top leaders emphasized at an annual economic planning meeting in December.

Many analysts expect China will maintain its zero-tolerance policy for controlling the pandemic until at least the fall. That’s when the ruling Chinese Communist Party is set to hold a meeting that is expected to give President Xi Jinping an unprecedented third term.

More immediately, just ahead of the Beijing Winter Olympics’ kickoff on Feb. 4, authorities are focused on ensuring the Lunar New Year doesn’t contribute to further outbreaks. The holiday travel season is set to run from Jan. 17 to Feb. 25, the Goldman analysts pointed out.

Chinese authorities are widely expected to announce a growth forecast of at least 5% for 2022 during an annual meeting in March.

That’s above Goldman’s revised GDP forecast of 4.3%, the analysts pointed out.

To reconcile this potential gap between actual growth and the GDP target, the bank’s analysts said Beijing could deploy more stimulus or discard the growth target — as was the case in 2020.

They also noted previous instances in which weakness in some measures of growth did not keep the official GDP figure from meeting the government’s target.

The accuracy of China’s official economic data is frequently doubted.

“Lastly, of course it could turn out that we are overestimating the growth impact of Omicron and Covid more generally, given accumulated public health system experience with the virus and continued refinements in the border quarantine and domestic virus control regimes,” the Goldman analysts said.