Goldman Sachs Research
Global Economics Analyst
The Boost to Global Growth and Inflation From China’s Reopening (Briggs/Kodnani)
2 February 2023 | 6:14PM EST | Research | Economics| By Jan Hatzius and others
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  • Growth in China is set to accelerate as the country reopens sooner than expected. This rapid reopening will likely generate moderately positive spillovers to global growth in 2023, as well as a more modest boost to global inflation.

  • There are three direct channels through which China’s reopening will likely impact global growth. First, increased domestic demand in China—to the tune of a 5% increase—should boost goods exports from other economies, although this growth boost should prove modest outside of Asia-Pacific economies. Second, a recovery in demand for foreign services—particularly for international travel—should provide a modest boost to global growth as well. Third, higher oil demand will benefit oil exporters, but higher oil prices will likely weigh on real income and growth in other economies.

  • Second-round spillovers should also provide a meaningful growth boost, since standard top-down estimates suggest that each 1% increase in China GDP raises broader global growth by 0.2pp. After adjusting these elasticities to incorporate the factors unique to China’s current reopening, we estimate that the full recovery in Chinese domestic demand should raise global GDP by around 1% through end-2023, with a smaller boost extending into 2024.

  • We also anticipate that China’s reopening will boost global inflation. Supply improvements from China’s reopening should lower US core inflation by around 0.1pp, but this core inflation drag will be mostly offset by a boost from higher aggregate demand, and—according to our commodity strategists’ oil price estimates—the full effect of China reopening could raise US headline inflation by ½pp. We similarly estimate that China’s reopening will moderately boost headline inflation in most other economies.

  • These effects are now fully incorporated into our economic forecasts. Most notably, since the publication of our outlook in November, our global growth forecast for 2023 has increased by 0.5pp to 2.3%, and the more aggressive reopening pace in China is one important reason why our GDP forecasts are well above consensus in most major economies.

The Boost to Global Growth and Inflation From China’s Reopening

Since the publication of our outlook in November, the global growth backdrop has brightened. 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.
We expect a more front-loaded and larger pickup in Chinese growth in 2023 than we did previously (Exhibit 1), and now forecast that GDP in China will grow 6.5% in 2023 on a Q4/Q4 basis. In this Global Economics Analyst, we examine the effects of China’s reopening on the global economy, and forecast moderately positive spillovers to global growth and a more modest boost to global inflation in 2023.

Exhibit 1: China’s Reopening Growth Boost Is Happening Sooner Than Previously Expected

1. China’s Reopening Growth Boost Is Happening Sooner Than Previously Expected. Data available on request.
Source: Goldman Sachs Global Investment Research

Direct Effects on Growth

There are three direct channels through which China’s reopening will likely impact global growth. First, increased domestic demand in China should boost goods exports from other economies. Second, a recovery in international travel should boost net service exports as well. Third, higher Chinese oil demand and prices will benefit oil exporters but likely weigh on real income and growth elsewhere.

Channel #1: Core Goods Trade

First, we expect China’s reopening to provide a lift to core goods exports among China’s trade partners. Our Asia economics team estimates that Covid restrictions were subtracting—and reopening should provide—a roughly 5% domestic demand impulse in China. This weakness in demand and consumption is reflected in Chinese goods import volumes, which have lagged the global rebound by around 15% since the start of 2022 (Exhibit 2).

Exhibit 2: Chinese Import Growth Lags the Rest of the World

2. Chinese Import Growth Lags the Rest of the World. Data available on request.
Source: Haver Analytics, Goldman Sachs Global Investment Research
In Exhibit 3, we report major economies’ exposure to higher Chinese goods imports using each region’s exports to China as a share of GDP in 2021. These shares alone likely provide an incomplete picture of the relative goods trade boost because roughly one-third of goods exports to China are for so-called “processing trade”—that is, they are intermediate inputs for goods which are ultimately re-exported. Given that processing trade volumes are largely determined by demand elsewhere, we provide an estimate of the portion of exports linked to domestic demand—i.e., excluding processing trade and other residual categories—as well. Unsurprisingly, Asia-Pacific economies have the greatest export exposure, with Australia and New Zealand the most exposed to domestic demand after accounting for a larger intermediate goods contribution in regional Asian EM (ex-Mainland China and India) economies.

Exhibit 3: Asia-Pacific Economies Have Greater Export Exposure to China Than the US

3. Asia-Pacific Economies Have Greater Export Exposure to China Than the US. Data available on request.
Source: Haver Analytics, China Customs, Goldman Sachs Global Investment Research
Given these exposures, and assuming a 5% increase in domestic demand as well as conservative elasticities[1] relating Chinese demand growth to goods import growth, we estimate that reopening-led goods demand will provide a moderate boost of 0.3-0.4% to GDP in most Asia-Pacific economies and roughly half that in Latin America, but relatively small positive effects elsewhere (Exhibit 4).

Exhibit 4: Moderate Direct Effects on Asia-Pacific GDP, but Negligible Effects in DMs

4. Moderate Direct Effects on Asia-Pacific GDP, but Negligible Effects in DMs. Data available on request.
Source: Goldman Sachs Global Investment Research

Channel #2: International Travel

Second, China’s reopening should also provide a boost to global growth by driving a recovery in demand for foreign services, particularly for international travel. Prior to the pandemic, China was a net importer of travel services from most economies (left chart, Exhibit 5), with an overall travel trade deficit of more than $200bn. A sharp reduction in visitors to and from China while it pursued a zero-Covid policy led the travel trade deficit to shrink to just over $100bn in 2022,[2] but a normalization in travel patterns—which we expect will mostly occur in 2023H2—should lead China’s travel trade deficit to increase and boost foreign GDP.
The right chart of Exhibit 5 shows the expected boost to GDP levels from travel-related trade following China’s reopening. We estimate that a full normalization of international travel will provide a sizable GDP boost to Asian EMs and other regional economies but a more modest boost elsewhere, although we could imagine somewhat larger effects if there is significant “pent-up demand” for international travel from China.[3]

Exhibit 5: A Larger Tourism Boost in Asian EMs and DM Economies

5. A Larger Tourism Boost in Asian EMs and DM Economies. Data available on request.
Source: OECD, WTO, Goldman Sachs Global Investment Research

Channel #3: Commodity Demand

Third, China’s reopening should provide a boost to commodities demand and prices, particularly for oil. Our commodities strategists estimate that Chinese oil demand is roughly 1.6mn barrels per day below trend, and that a recovery to trend should boost Brent oil prices by roughly $15/bbl. In a more aggressive reopening scenario in which international travel recovers more rapidly—a close call relative to our baseline—prices could rise further, for a cumulative increase in oil prices of up to $21/bbl, or over 20% of the current level (Exhibit 6).[4]

Exhibit 6: Reopening Could Boost Brent Prices by Over 20%

6. Reopening Could Boost Brent Prices by Over 20%. Data available on request.
Source: Haver Analytics, Goldman Sachs Global Investment Research
For most economies, higher oil prices will weigh on real incomes and growth, thereby offsetting the boost from the recovery in goods and services trade. However, net oil exporters such as Canada and some Latin American economies should benefit from higher prices and demand. Using our country teams’ previously estimated elasticities from higher oil prices to GDP, we estimate that reopening-led oil price increases will add 0.1-0.3% to Canada and LatAm GDP levels but will subtract 0.1-0.6% from GDP in other economies (Exhibit 7).

Exhibit 7: A Growth Drag From Oil Prices in Europe; a Boost in Oil Exporters

7. A Growth Drag From Oil Prices in Europe; a Boost in Oil Exporters. Data available on request.
Source: Goldman Sachs Global Investment Research

Sizing the Overall Growth Impulse

For the most part, the direct effects on foreign GDP from China reopening are likely to be fairly small. In the US, for example, combining our estimates of the direct boost from increased goods (+0.02%) and net travel exports (+0.09%) with the hit from higher oil prices (-0.15%) implies a negligible effect on US GDP growth (-0.04%). Estimates for other economies similarly imply small direct effects, although the effects on EM Asia GDP are somewhat larger due to the greater economic exposure to China.
In contrast, standard top-down estimates of the global spillovers from an increase in Chinese growth are generally much larger, likely because they capture both direct effects as well as second-round spillovers from trade with other countries and the effects of an easing of global financial conditions. Our prior analysis of global growth spillovers from China implies that each 1pp boost to China growth raises DM GDP levels by 0.1-0.2%, ex-China EM GDP levels by 0.1-0.4% (with significant regional heterogeneity), and global GDP by approximately 0.2% (Exhibit 8). These growth elasticity estimates are consistent with recent research from the Federal Reserve Board, which uses policy-induced demand shocks to estimate that a 1% increase in China GDP raises global ex-China GDP by roughly 0.2-0.3%.

Exhibit 8: Top-Down Estimates Suggest Significant Spillovers From China Growth to Other Economies

8. Top-Down Estimates Suggest Significant Spillovers From China Growth to Other Economies. Data available on request.
Source: Goldman Sachs Global Investment Research
A significant caveat to these and other top-down growth elasticity estimates is that they are generally estimated in an environment of substantial global slack, and therefore might overstate the impact from China growth when labor and product markets are already very tight. It is therefore quite possible that second-round trade and FCI effects might provide a smaller-than-normal boost to global growth. However, academic studies generally conclude that global growth spillovers have increased over time due to an increase in financial and economic interdependence,[5] so—absent contrary evidence—the elasticity estimates in Exhibit 8 reflect our baseline guesses of the spillovers to global growth from China.
In Exhibit 9, we augment our baseline top-down growth elasticities with factors unique to China’s current reopening—a larger than normal increase in oil prices, a larger than normal boost to services trade, and a smaller than normal boost from goods trade given that China’s reopening will primarily boost domestic demand—to estimate the cumulative effect of the full China reopening and its associated 5% increase in domestic demand by region. Our estimates suggest that regional economies and oil exporters are likely to be the biggest winners from China’s reopening, but that China’s reopening should provide a healthy boost to GDP levels in most economies.

Exhibit 9: Regional Economies and Oil Exporters Are Likely to Be the Biggest Growth Winners From China’s Reopening

9. Regional Economies and Oil Exporters Are Likely to Be the Biggest Growth Winners From China’s Reopening. Data available on request.
Source: Goldman Sachs Global Investment Research
In Exhibit 10, we combine our China team’s estimate of the timing of the reopening impulse (which assumes an approximate 3% boost to China GDP in 2023 and 1% boost in 2024), the growth elasticities for each region (Exhibit 9) and our own estimates of the timing of spillovers to estimate the boost to global growth from China’s reopening. Our estimates suggest that China’s reopening should provide a 1% boost to global GDP in 2023—with about 60% of this effect coming directly from the pickup in China growth and 40% coming from spillovers to other economies—with a smaller boost due to lagged effects extending into 2024.

Exhibit 10: China's Reopening Should Boost Global GDP by 1% by End-2023

10. China's Reopening Should Boost Global GDP by 1% by End-2023. Data available on request.
Source: Goldman Sachs Global Investment Research

Effects on Inflation

China’s reopening is likely to impact global inflation through the aforementioned rise in oil prices and pick-up in global growth, as well as through its effect on the supply chain normalization process that we anticipate will be a key driver of disinflation in 2023.
First, the inflationary effects of higher oil demand follow neatly from the price estimates we reported in Exhibit 7. Combining our commodity price estimates with our country teams’ estimated sensitivities of headline inflation to oil prices, we estimate that reopening-led oil price increases will contribute 0.5-0.6pp to headline inflation in most EMs and roughly half that in the US, though effects could be roughly 40% larger in the event of a faster reopening pace (Exhibit 11).

Exhibit 11: A Larger Oil Price Effect on Headline Inflation in EMs

11. A Larger Oil Price Effect on Headline Inflation in EMs. Data available on request.
Source: Goldman Sachs Global Investment Research
Second, firmer growth should contribute to modestly higher core inflation. Combining our standard rules of thumb in DMs and EMs respectively[6] with our China growth spillover estimates, we expect that stronger growth will add 0.6pp to inflation in LatAm, 0.4pp in regional Asian EMs, and 0.15pp in the US.
Third, an end to lockdowns and other mobility restrictions should help ease supply constraints in China and lower core goods inflation.
As Exhibit 12 shows, Covid restrictions in China—as captured by our Effective Lockdown Index (ELI)—have diverged from those of its regional peers at the same time that Chinese exports to the US have underperformed (left panel). The relative underperformance of Chinese exports may have slowed the pace of US goods disinflation given the country’s large stake in a wide range of export categories (Exhibit 12, right panel).

Exhibit 12: Covid Restrictions Are Weighing on Chinese Exports to the US, which Span a Wide Range of Goods Categories

12. Covid Restrictions Are Weighing on Chinese Exports to the US, which Span a Wide Range of Goods Categories. Data available on request.
Source: Haver Analytics, Goldman Sachs Global Investment Research
To estimate the effect of China’s reopening on goods prices, we construct a model based on the experience of other Asian reopeners, exploiting changes in our ELI and interacting them with the share of disaggregated US PCE goods categories imported from various countries to predict price changes in those categories at various horizons. This approach implies that the 30pt decline in the Asia ex-China ELI—an amount roughly corresponding to the effect of full reopening relative to its 2021 average—accounts for roughly 1.5pp of the 4.5% swing in US core goods inflation that we anticipate in 2023 (Exhibit 13).

Exhibit 13: Asian Reopening and Associated Supply Chain Improvements Have Been a Key Source of Goods Disinflation in the US

13. Asian Reopening and Associated Supply Chain Improvements Have Been a Key Source of Goods Disinflation in the US. Data available on request.
Source: Goldman Sachs Global Investment Research
To estimate the effects from supply chain improvements in China, we scale our regression estimates using China’s shares in goods imports (and goods shares in consumer spending) to generate headline inflation estimates across regions. Our results suggest that further supply chain normalization should subtract 0.1-0.2pp from core inflation in the US and other DMs with somewhat larger effects in regional Asian and other EM economies (Exhibit 14), although we do see some scope for smaller effects given that the worst disruptions in global supply chains are well behind us.

Exhibit 14: Asian EMs Should Benefit the Most From Easier Chinese Supply Chains

14. Asian EMs Should Benefit the Most From Easier Chinese Supply Chains. Data available on request.
Source: Goldman Sachs Global Investment Research
Combining estimates, we expect that China’s reopening will be moderately inflationary. In most economies, effects on core inflation from firmer growth and easier supply chains should roughly offset, leaving commodity prices as the most salient driver of headline inflation, particularly in oil-dependent EMs. We expect that China’s reopening will account for a 0.3-0.5pp boost to headline inflation in most economies, although the effects are smaller in some DMs (Exhibit 15).

Exhibit 15: On Balance, China Reopening Should Be Moderately Inflationary

15. On Balance, China Reopening Should Be Moderately Inflationary. Data available on request.
Source: Goldman Sachs Global Investment Research

Upside to Global Growth and Inflation

Ultimately, our findings suggest that China’s reopening is likely to be a key source of global growth in 2023, accounting for 40% of the 2.6% increase in global GDP we expect this year on a Q4/Q4 basis.
Our 2023 outlook already assumed a sizable activity boost from China’s reopening, and since then, the effects of the earlier reopening timeline have been incorporated into all of our major forecasts (see Appendix table). Faster reopening in China is a key reason why we have revised up growth in most economies over the last two months (Exhibit 16), and China’s reopening is one important reason why we forecast that growth will run above consensus expectations in 2023.

Exhibit 16: Earlier Reopening Means Stronger Global Growth in 2023

16. Earlier Reopening Means Stronger Global Growth in 2023. Data available on request.
Source: Goldman Sachs Global Investment Research
At the same time, the clear risk from reopening is that stronger growth could lead inflation to surprise to the upside later this year. 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.

Joseph Briggs

Devesh Kodnani

Appendix: Recent Coverage of China's Reopening From Our Regional Economics Teams

Team

Publication

EM Economics

EM Macro Navigator: China's Reopening—How Much of a Lift to EM?, 23 January 2023. Key finding: Spillovers from China's growth will be mostly positive, especially for Asia, with trade effects outweighing higher commodity prices and limited potential for supply-side disruptions.

Europe Economics

European Economics Analyst: Spillovers From China's Reopening, 16 January 2023. Key finding: China's earlier reopening should boost European growth noticeably this year, accounting for roughly one-third of our recent 0.6pp growth upgrade in the Euro area, and is thus a key reason why we no longer expect a Euro area recession.

Asia Economics

Asia in Focus: Sizing the Regional Trade Boost From China's Reopening, 19 January 2023. Key finding: Potential upside for regional trade could be sizable, particularly in the tech and auto sectors which were disproportionately impacted by pandemic disruptions.

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Asia Economics Analyst: The Impact of China's Reopening on Other Regional Economies, 11 December 2022. Key finding: Hong Kong looks posed to benefit the most from China's reopening, followed by Thailand, Singapore, and Malaysia, with higher tourism contributing disproportionately.

Japan Economics

Japan Economic Flash: Tightening FCI vs. Improving Global Climate: We Trim Our 2023 Japan Growth Forecast, 27 January 2023. Key finding: Tighter financial conditions and weaker consumption resulting from higher covid-19 infections should lower growth by as much as 0.7pp, but the growth boost from China's reopening and firmer European growth should offset roughly 80% of this negative impulse.

Australia and New Zealand Economics

Australia and New Zealand: Energy Intervention and China Reopening Risks in Focus, 15 December 2022. Key finding: China's faster reopening pace provide 0.1-0.2pp of upside risk to ANZ GDP growth, but effects on goods exports should be more muted than usual due to a likely goods-to-services rotation in China.

CEEMEA Economics

CEEMEA in Focus: Impact of China Reopening on CEEMEA — Meaningful but Mostly Indirect, 20 January 2023. Key finding: China's faster reopening should be a positive for CEEMEA growth, with second-round trade effects from stronger activity in Western Europe disproportionately contributing in CEE-4, but the growth impulse could turn negative if oil prices rise by at least 10%.

LatAm Economics

Latin America Economics Analyst: China's 'Zero-Covid' Exit: A Potential LatAm Entry Into Higher Growth Path, 27 January 2023. Key finding: China's reopening is likely to have a mild-to-moderate positive impact on growth in LatAm economies (especially in net oil exporters), providing support for our already above-consensus growth forecasts.

  1. 1 ^ We previously found that the sensitivity of real exports to real GDP generally ranged between 1.0 to 3.0 from since 2000, approaching 1.5 in years leading up to the pandemic. Separately, as part of this piece, we estimate an average elasticity of Chinese goods imports to GDP of 2.6 for EMs and 1.7 for DMs. We judgmentally adjust these estimates downward to 1.5 and 1.0 respectively to reflect lower global slack in activity and a likely goods-to-services rotation as Chinese demand recovers.
  2. 2 ^ China’s travel trade deficit remained somewhat elevated because travel imports also include tuition payments by overseas students and other items.
  3. 3 ^ For the outlook of the tourism rebound in Thailand, for example, our 2023 ASEAN outlook has more detailed estimates.
  4. 4 ^ Market forwards, unlike our commodity strategists' estimates, do not imply a large increase in oil prices this year. In this piece, we only consider the estimated incremental impact of China's reopening on oil prices, which is agnostic to the ultimate level of oil prices.
  5. 5 ^ See, for example, IMF research note Furceri, Jalles, and Zdzienicka (2017).
  6. 6 ^ For EM economies, we use our existing estimate that each 1pp increase in the output gap increases inflation by 0.3pp. For DM economies, we combine our US Okun’s law coefficient relating changes in GDP growth to changes in the unemployment rate of 2 and our estimated Phillips curve coefficient of 0.1 to produce an overall coefficient relating changes in growth to changes in inflation of 0.2.

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+1 212 902-0394
jan.hatzius@gs.com
Goldman Sachs & Co. LLC
+1 212 902-2163
joseph.briggs@gs.com
Goldman Sachs & Co. LLC
Devesh Kodnani