China’s post-Covid recovery is firmly on track as the country reopens after ending most of its strict Covid restrictions at the beginning of the year. First quarter gross domestic product grew 4.5% on an annual basis according to data released on Tuesday. The economy accelerated from the previous quarter reading of 2.9% and exceeded forecasts for 4% growth.

The Chinese economy is off to a solid start in 2023 as consumers went on a spending spree. The abandoning of zero-Covid policy measures triggered a sharp rebound in business activity and spending, with pent-up demand greatly benefiting the service industry. The recovery was also helped by stimulus measures by the government, aiming to support the economy after the pandemic-driven slump.

Last month the government set a gross domestic product target of 5% for 2023, while some investment banks have more bullish views and anticipate the full year numbers to be stronger.

China’s first-quarter gross domestic product rose strongly while global peers’ growth has been slowing as central banks’ aggressive monetary tightening weighs. However, the market reaction was muted, which is a sign that probably traders are worrying the strong growth in the first quarter may not be maintained and are expecting more subdued data for the rest of 2023.

Retail sales jumped 10.6% in March blowing expectations of 7.4%, as online sales picked up, showing that consumer spending is steadily picking up after almost three years of Covid disruptions.

The recovery so far remains largely uneven. While service sector demand and infrastructure spending have rebounded from the pandemic lows, sluggish inflation and shrinking imports indicate that demand remains weak. Chinese manufacturing is also struggling to recover as overseas demand for Chinese goods remains low.

Despite signs of an uneven recovery, the Chinese economic rebound appears to be on track this year, and the government’s 5% annual gross domestic product target might turn out to be conservative.

The International Monetary Fund upgraded China’s growth forecast this year and see the rebound as strong and sustainable. The IMF forecasts GDP growth of 5.2% in 2023 and 5.1% in 2024.

Most economists do not expect the People’s Bank of China to change its lending rate, however; if inflation slows further a modest cut to the one-year loan prime rate could be seen. Beijing is likely to maintain a pro-growth stance to support pick up in demand with an extra government stimulus to boost infrastructure investments likely this year.

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