China’s reopening is poised to boost global growth

China’s reopening from Covid-19 restrictions will not only accelerate the country’s economic recovery, but it will also boost global economic growth, according to Goldman Sachs Research.

Due to the faster-than-expected rate of reopening, our economists now forecast China’s GDP to grow by 6.5% in 2023 on a Q4/Q4 basis. On top of that, the reopening—and the recovery of Chinese domestic demand—could raise global GDP by 1% by the end of 2023, GS Research’s Joseph Briggs and Devesh Kodnani write in a new report.

“The global growth backdrop has brightened,” Briggs and Kodnani say. “While we already expected most major economies to avoid recession and China to see a growth rebound from an end to zero-Covid, the more rapid pace of China’s reopening since then—along with a waning drag from global financial conditions and lower European gas prices—has prompted us to upgrade our expectations further.”

China’s reopening will impact global growth through “three direct channels,” according to Briggs and Kodnani.

1. Increased domestic demand: Reopening is expected to lift core goods exports among China’s trade partners. Our economists estimate that reopening should increase domestic demand by up to 5% in China. Unsurprisingly, this is welcome news for China’s regional neighbors, as Asia-Pacific economies export more goods to China than many Western economies. This return in goods demand could provide a moderate boost of around 0.4% to GDP in most Asia-Pacific economies, Briggs and Kodnani say.

2. International travel: China’s exit from zero-Covid policy should also drive a recovery in demand for foreign services, particularly for international travel. Before the pandemic, China was a net importer of travel services from most economies. And while this took a hit during tight Covid restrictions, a normalization in travel patterns—which Briggs and Kodnani expect to occur mostly in the second half of 2023—should lead China’s travel trade deficit to increase and boost foreign GDP.

3. Commodity demand: China’s reopening will likely boost commodities demand and prices, particularly for oil. Our commodities strategists estimate that Chinese oil demand could recover by at least 1 million barrels per day, boosting Brent oil prices by roughly $15 per barrel. If international travel recovers more rapidly, Briggs and Kodnani say these prices could rise even further. For most economies, higher oil prices will weigh on economic growth. However, net oil exporters such as Canada and some Latin American economies could benefit from higher prices and demand.

While Briggs and Kodnani expect the direct effects on foreign GDP from China’s reopening to be modest outside of Asia, they anticipate the broader spillover effects from Chinese growth—including more favorable global financial conditions and increased trade with other countries—to be larger. 

However, China’s reopening is also likely to boost global inflation, Briggs and Kodnani say. For most economies, the impact on core inflation is likely to be minimal, as the inflationary effect of firmer growth is roughly offset by disinflation from easing supply-chain constraints, the economists explain. That said, they expect rising commodity prices to contribute to headline inflation, particularly for oil-dependent emerging markets. China’s reopening could account for a 0.5 percentage point boost to headline inflation in many economies, according to Briggs and Kodnani.

“The clear risk from reopening is that stronger growth could lead inflation to surprise to the upside later this year,” they say. “As a string of mostly downside inflation surprises have driven an easing in global financial conditions and enabled central banks to slow the pace of rate hikes in recent months, a larger inflation impulse from reopening may force central banks to hike rates further than markets currently expect to keep growth below potential and remain on track to tame inflation.”