Consumption growth is bouncing back much faster than manufacturing in China's imbalanced recovery

Consumption, rather than manufacturing, will play an outsized role in China’s recovery this year

2023 will be the year when China recovers from the economic downturn caused by COVID-19. However, the business environment is likely to be vastly different from what multinational corporations (MNCs) have experienced in the past few decades. While a rising tide may lift all boats, MNCs operating in China need to adapt to the evolving business landscape to capture the opportunities that arise.

First, MNCs should expect China to post lower growth rates moving forward. After this year, in which figures will be inflated by base effects, its annual growth is expected to range from 4% to 6%. Because the market will not grow as quickly as it did before, MNCs will have to ensure their expectations take this deceleration into account. 

Second, China is unlikely to go back to the old playbook of building itself out of slowdown, given its high debt burden and the financial distress of local governments. MNCs that relied on contracts from the state-owned sector linked to massive infrastructure projects will need to explore new revenue sources.

Third, the real estate sector, which has been a driving force for China’s economy for decades, will no longer hold the same position. All sectors connected to the housing market, from raw materials to home appliances, furniture, and renovation, will be impacted. MNCs involved in these sectors will need to find new revenue sources as well.

Finally, China’s younger generation will face challenging times in terms of job prospects and earnings. MNCs that have targeted young people in the past will need to focus on consumers with more stable jobs and savings. Those that still want to attract young consumers can offer more experiential products.


  • China’s economy grew 4.5% YOY in Q1 2023, up from 2.9% YOY in Q4 2022. Consumption was the driving force behind this recovery, with a YOY expansion of 5.8% in Q1, as opposed to a contraction of 4.5% YOY in the previous quarter.
  • In contrast, industrial production’s recovery was underwhelming, increasing by only 3.9% YOY in Q1, slightly higher than the 3.6% YOY growth in 2022. Fixed-asset investment also underperformed, growing by 5.1% YOY in Q1, the same as in 2022. Private sector investment increased by only 0.6% YOY in Q1. Investment in the real estate sector continued to contract, with a YOY growth rate of -5.8% in Q1, and the floor space of newly started real estate tumbled -19.2% YOY in the same quarter.
  • While the overall urban unemployment rate fell to 5.3% in March, down slightly from 5.6% in the first two months of the year, the unemployment rate for young people ages 16–24 increased to 19.6% in March, nearly reaching a record high.

Our View

Given the havoc caused by zero-COVID policies in 2022, China’s recovery in 2023 is practically a given. The Q1 numbers released earlier this week confirm that. However, diving a bit deeper, they also present a very mixed picture of the country’s post-COVID recovery. The headline GDP growth of 4.5% YOY is better than most (including FrontierView) forecasted. The 10.6% YOY expansion of retail sales in March is particularly impressive, suggesting the economic recovery is mainly being driven by consumption. A 26.3% YOY jump in catering revenues in March reinforces our view that Chinese consumers will be spending more on services than goods along the path to recovery. Considering the base effect from Q2 last year, the recovery of consumption in Q2 2023 will be even more robust.

However, there are also parts of the economy that failed to live up to expectations, notably industrial production and fixed-asset investment. What it reveals is twofold: a) China has not stimulated, and will probably refrain from stimulating, the economy very aggressively in the traditional way of boosting infrastructure building and construction, and b) the gloomy global outlook has weighed on China’s manufacturing sector in the past quarter, especially in the export space. The latter trend is likely to continue into H2 this year, as FrontierView forecasts a shallow recession in the US and Europe, followed only by a very modest recovery.

There is no doubt that China’s post-COVID recovery has begun, but it is increasingly uneven, not only between manufacturing and consumption, but also between consumer spending on services and on goods. This is in line with our previous projections and will likely continue for the rest of the year.

In short, China’s reopening has certainly boosted growth, offering grounds for optimism. Yet, the broader system still suffers from long-term structural issues, such as the debt crisis in the real estate sector (although situations have stabilized recently), the record-high unemployment rate among younger workers, and the deteriorating relationship with the Western world. China is not out of the woods yet; Beijing still faces formidable challenges.

At FrontierView, our mission is to help our clients grow and win in their most important markets. We are excited to share that FiscalNote, a leading technology provider of global policy and market intelligence has acquired FrontierView. We will continue to cover issues and topics driving growth in your business, while fully leveraging FiscalNote’s portfolio within the global risk, ESG, and geopolitical advisory product suite.

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