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2022 Macroeconomic Outlook: Focus Turning to Demand
In 2022, we believe that the macroeconomic focus will shift from the supply side to the demand side. Energy shortages push up the operating costs of companies. This, coupled with the impact of strict real estate regulation, increases the debt burden of non-government sectors, which we believe will exert downward pressure on domestic demand in 2022. We think monetary policy will remain moderately loose, while fiscal policy may play a greater role. The US has experienced substantial macro policy expansion. We think labor shortages in the US will push up wages and consumer demand and increase the demand for desirable inventories, lending continued support to China’s exports next year. In 2022, we believe China’s economic growth may stabilize and pick up; PPI inflation may fall from highs, but still be higher than before the COVID-19 pandemic; CPI inflation may rebound from lows.
Energy shortages lead to relative price changes, increasing costs and lowering the quality of balance sheets in downstream and midstream industries. This, coupled with a weakening real estate industry, increases the debt burden of non-government sectors. The cost-to-revenue ratio of manufacturing industries hit a 4-year high in September 2021, and public utilities, the construction industry, and small and medium-sized enterprises were under greater cost pressures. The liability-to-asset ratios of manufacturing industries and public utilities in August 2021 both rose 0.4ppt compared with end-2020, and the YoY growth rate of household disposable income slowed slightly compared with 4Q20. We think energy shortages may ease in 2022, but in the early stage of the carbon peak and carbon neutrality initiatives, it may be difficult for alternative energy sources to fully fill up the gap between energy supply and demand due to their unstable supply and low net energy coefficient (ratio of energy output to input). In 2H21, the proportion of real estate companies’ completed but unsold inventories has risen and the operating pressure of real estate companies in lower-tier cities has increased. Considering cooperation among property developers has become common in recent years, we should also pay attention to the impact from the spillover effects of real estate debt on demand. That said, we believe real estate regulation is conducive to the healthy development of the economy in the medium and long term, just as the carbon peak and carbon neutrality initiatives will improve the quality of China’s economic growth.
Unlike goods, the supply of labor, both as a factor of production and a source of demand, is inelastic. Labor shortages in the US push up wages and support demand. Given the US’s still high money growth, we believe this will continue to support China’s exports in 2022. Global exports are mainly supported by prices. However, volumes have made a greater contribution to China’s exports than prices in 2021, suggesting China’s exports are indeed resilient. The US’s monetary and fiscal expansion has improved the balance sheet of US households, and unskilled labor has seen higher wage increases due to labor shortages, which have pushed up consumer demand. Labor shortages also increase companies’ demand for desirable inventories by raising the opportunity cost of inventories. Data shows that the desirable inventory level in the US is well above the actual inventory level. We don’t expect the phenomenon of labor shortages in the US to change fundamentally in 2022. The US already experienced a shortage of unskilled labor before the pandemic, and the pandemic only exacerbated the shortage. The number of early retirees has increased sharply, and the values of unskilled labor have changed considerably due to the pandemic, causing the labor force participation rate to drop notably. We predict that the US economy may grow about 3.5% in 2022, and China’s exports may maintain a growth rate of about 5%. However, high freight rates may erode profits of some companies.
We expect China’s macro policies in 2022 to continue featuring a combination of credit tightening, monetary easing and fiscal expansion. We believe fiscal policy will play a more important role, and reducing fiscal revenue may be an important policy option in addition to supporting infrastructure investment. We think the central bank may lower the reserve requirement ratio or even interest rates in 1H22. Against the backdrop of upstream supply constraints, we think infrastructure investment may accelerate but only to a moderate extent, and tax cuts and fee reductions may also be an important direction. Consumption may pick up thanks to policy support and improvement of the COVID-19 situation. We estimate YoY real GDP growth at 5.7% in 1Q22, 4.8% in 2Q22 (5.2% in 1H22), 6% in 3Q22, 4.9% in 4Q22 (5.4% in 2H22), and about 5.3% for the full year of 2022. Seasonally-adjusted QoQ GDP growth may also pick up gradually. If fiscal expansion is stronger, GDP growth may be higher than our current forecast. Considering base effect, we expect YoY PPI inflation to be higher in 1H22 and lower in 2H22, and average about 4% for the full year; meanwhile, we expect YoY CPI inflation to be lower in 1H22 and higher in 2H22, and average about 2% for the full year.