China's economic rebound matters greatly for Europe, modest or not 

Modesty can be an undervalued quality. China’s target for economic growth this year isn’t ambitious, but it doesn't have to be to make a difference. Anything that improves on the country's recent performance is welcome and puts a floor under the global expansion — even if the numbers don't do much to accelerate activity. A middling rebound, though, may be strong enough to worry hawkish policymakers a long way from Beijing.

China’s goal to increase gross domestic product by about 5 percent has been widely criticized as lacking drive, especially given the strong start to the year after authorities dismantled pandemic controls. The number is a tad less than the 5.5 percent aspired to in 2022. Now that COVID Zero isn’t holding back commerce, shouldn’t Premier Li Keqiang have aimed higher? Not necessarily. Growth last year was just 3 percent, so if China can achieve — or get close — to the new target, that would be a reasonable outcome.

Such a recovery may not be exciting, but it’s enough to mean the difference between a slowdown and recession. The biggest brakes on the global economy last year were the upward march in interest rates, Russia’s invasion of Ukraine and China’s draconian attempts to control COVID. Have we forgotten cries of  “if only China could open up?” Well, now it’s open. If critics are looking for results that replicate China in the early part of the century or even the last decade, that isn't plausible.

Li’s lowballing the forecasts serves two purposes: It will diminish speculation that China needs to tighten monetary policy and boost the government's credibility if growth exceeds aspirations. The latter is a decent bet: Many economists tip a number that's closer to 5.5 percent; Bloomberg Economics projects 5.8 percent. Yes, those expectations will disappoint some. For others, a China back on line looks ominous. The rapid reopening is providing fresh ammunition for worrywarts in Europe.

Inflation clearly isn't licked, pretty much anywhere. Yet it's in Europe that the fear of price spirals is greatest and where the surge in prices has been most acutely felt. The European Central Bank was the slowest of the big monetary authorities to start raising rates; only in July did the ECB break its eight-year long dependence on negative rates. You can understand the anxiety — reopening in other major economies has been accompanied by spurts of inflation. Price gains are moderate in China, for now, at around 2 percent. But it is the country's ability to influence inflation and spending outside its domestic economy, not just in its appetite for natural resources, that inspires the most enthusiasm — and trepidation.

A China that's getting back on its feet will be a boon to German carmakers, as wealthy middle-class Chinese consumers have a penchant for European luxury goods. German manufacturing has been struggling of late, with chemical giant BASF SE closing several factories. GDP shrank last quarter, a dip driven by falling private consumption and capital investment — both badly affected by the last year's surge in energy prices. The German purchasing manufacturers survey showed a fall in new foreign orders. (China is Germany's No. 1 export destination.)

Nonetheless, much of this might be in the rear-view mirror as both the forward-looking German IFO and ZEW business surveys recovered in January. Expectations are growing that the ECB will push rates markedly higher before pausing — and keep them there longer. Deutsche Bank AG recently raised its estimate for the ECB's terminal rate to 3.75 percent from 3.25 percent. A hike in the benchmark rate to 3 percent is widely anticipated when policymakers meet next week. “It would be a cardinal sin to let up too soon,” Bundesbank President Joachim Nagel said recently.

Imagine the reaction if China's economy really did start roaring back, boosting Germany's export machine as it so amply did pre-pandemic. Particularly, if the flattening base effects of last year's gas price surge had finished passing through the headline euro-zone inflation figures. The region’s core inflation rose to a record 5.6 percent in February, even as the headline rate dipped to 8.5 percent from a peak of 10.6 percent in October.

The 2023 investment outlook was supposed to be the inverse of the pain delivered last year: inflation coming off the boil and the most muscular monetary tightening in a generation giving way to something more benign. A solid performance by China risks another act to the melodrama that characterized the past 12 months. Hawkish policymakers are not going to let their guard down so easily.

As conservative as Li's target is, China's recovery might yet prove to be disruptive.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Views are personal and do not represent the stand of this publication.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg