China’s economy grew faster-than-expected in the first quarter, data showed on Tuesday, offering some relief to officials as they try to shore up growth in the face of protracted weakness in the property sector and mounting local government debt.

However, a raft of March indicators released alongside the GDP data – including property investment, retail sales and industrial output – showed that demand at home remains frail and is retarding overall momentum.

The government has unveiled a raft of fiscal and monetary policy measures in a bid to achieve what analysts have described as an ambitious 2024 GDP growth target of around 5%, noting that last year’s growth rate of 5.2% was likely flattered by a rebound from a COVID-hit 2022.

Gross domestic product (GDP) grew 5.3% in January-March from the year earlier, data released by the National Bureau of Statistics showed, comfortably above analysts’ expectations in a Reuters poll for a 4.6% increase and slightly faster than the 5.2% expansion in the previous three months.

“The strong first-quarter growth figure goes a long way in achieving China’s ‘around 5%’ target for the year,” said Harry Murphy Cruise, economist at Moody’s Analytics.

“Industrial production also supported through the quarter, but weak March data is cause for some concern. Similarly concerning, China’s households continue to keep their wallets closed.”

On a quarter-by-quarter basis, GDP grew 1.6% in the first quarter, above the forecast for growth of 1.4%.

The world’s second-largest economy has struggled to mount a strong and sustainable post-COVID bounce, burdened by a protracted property downturn, mounting local government debts and weak private-sector spending.

Fitch cut its outlook on China’s sovereign credit rating to negative last week, citing risks to public finances as Beijing channels more spending towards infrastructure and high-tech manufacturing.

The government is drawing on infrastructure work – a well-used playbook- to help lift the economy as consumers are wary of spending and businesses lack confidence to expand.

WEAK MARCH DATA

The economy was off to a solid start this year, but March data on exports, consumer inflation, producer prices and bank lending showed that momentum could falter again and reinforced calls for more stimulus to shore up growth.

Indeed, separate data on factory output and retail sales, released alongside the GDP report, underlined the persistent weakness in domestic demand.

Industrial output in March grew 4.5% from a year earlier, compared with a forecast increase of 6.0% and a gain of 7.0% for the January-February period.

Growth of retail sales, a gauge of consumption, rose 3.1% year-on-year in March, against a forecast increase of 4.6% and slowing from a 5.5% gain in the January-February period.

Fixed asset investment grew an annual 4.5% over the first three months of 2024, versus expectations for a 4.1% rise. It expanded 4.2% in the January-February period.

“On the face of it, the headline number looks good… but I think the momentum is actually quite weak at the end,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets in Singapore.

Prior to the data release, analysts polled by Reuters expected China’s economy to grow 4.6% in 2024, below the official target.

Following the improved first-quarter GDP outcome, economists at ANZ raised their 2024 China growth forecast to 4.9% from 4.2% previously, while BBVA maintained their 4.8% growth projection.

Most investors appeared to take the headline GDP surprise with a pinch of salt given the weakness of the March data.

Traders said China’s state-owned banks were selling dollars to steady the yuan in the onshore market. China stocks .CSI300 were tracking broader markets lower as geopolitical tensions in the Middle East sapped risk sentiment.

CHALLENGES

The crisis in the property sector has been a major drag on China’s economy as it has rippled across business and consumer confidence, investment plans, hiring decisions and stock prices.

The March data highlighted the depth of the troubles in the sector, with investor confidence and demand still at a low ebb.

China’s new home prices fell at their fastest pace in more than eight years last month as debt troubles among property developers hurt demand.

Property investment slumped 16.8% year-on-year in March, worse than a 9.0% drop in January-February, while sales tumbled 23.7%, compared with a 20.5% fall in the first two months of the year.

With the Federal Reserve and other developed economies showing no urgency to start cutting interest rates, China may also face a longer period of subpar export growth in a further blow to policymakers’ hopes of engineering a strong economic recovery.

Adding to the challenge for China, authorities also have to contend with ongoing tensions with the United States over trade, technology and geopolitics.

Investors are looking to an expected Politburo meeting in April for clues on policy direction, though few analysts expect any major stimulus.

The People’s Bank of China (PBOC) has pledged to step up policy support for the economy this year, with markets betting on further cuts in banks’ reserve requirement ratio and interest rates.

Some analysts believe the central bank faces a challenge as more credit is flowing to production than into consumption, exposing structural flaws in the economy and reducing the effectiveness of its monetary policy tools.

Looking ahead, Jinyue Dong, senior economist at BBVA research, said he believes the “recovery has not got a solid foundation yet as the deep adjustment of real estate market and local government debt overhang still remain the main risks.”

“In addition, geopolitics risks mostly due to China-US confrontations before the US president elections will persist in the foreseeable future.”

Bangladesh outpaced its South Asian neighbors, India and Pakistan, in terms of prosperity in 2023, although a concerning setback in the Freedom Index shadowed the triumph.

According to the report “Freedom and Prosperity in Bangladesh” prepared by the Atlantic Council’s Freedom and Prosperity Center, Bangladesh was categorized as “mostly unprosperous” in the Prosperity Index and “mostly unfree” in the Freedom Index.

Bangladesh fared better on the Prosperity Index than its South Asian counterparts, ranking 99th among 164 countries, while India ranked 146th and Pakistan ranked 150.

However, the freedom index paints a grim picture, placing Bangladesh on the 141st spot, whereas India is on 104 and Pakistan is on 113 in the list made for 2023.

This Prosperity Index considers various factors beyond GDP per capita, including health, inequality, environmental conditions, minority rights, and education. Meanwhile, the Freedom Index measures political, economic, and legal components.

The US-based think tank’s research found that strengthening basic freedom accelerates economic growth over the long term.

The report said, “January parliamentary elections solidified a shift toward a dominant-party system. The Awami League capitalized on an opposition boycott to extend its fifteen-year rule, with prime minister Sheikh Hasina poised to become the world’s longest-serving female head of government. While this signifies stability, dominant-party systems often face challenges that can undermine good governance. Ensuring healthy competition across politics, government, and the economy is crucial to mitigate these risks.”

These findings were revealed at the Prosperity and Good Governance Conference, jointly organized by the United States Agency for International Development (USAID) and The Asia Foundation on Monday (15 April).

Speaking at the event, US Ambassador Peter Haas said, “Out of the 164 countries the Atlantic Council has looked at, not a single country ranked ‘mostly unfree’ is also ranked ‘prosperous.’ This suggests that, in order to become prosperous, Bangladesh must then take bold steps to expand economic, political, and legal freedoms for its people.”

“Every country grapples with issues like corruption and securing economic and political rights. The key lies not in avoiding problems but in actively acknowledging and tackling them,” he added.

The keynote speaker, Director of the Atlantic Council’s Freedom and Prosperity Center Joseph Lemoine, highlighted the key findings from the report, which measures a nation’s economic well-being based on their democratic and governance indicators considered for its Freedom Index and Prosperity Index.

“The data shows that countries with greater freedom tend to enjoy higher levels of prosperity, while those with less freedom tend to have lower levels of prosperity. Countries that promote political and economic freedoms, along with strong legal systems, create an environment that’s more welcoming to foreign Investors,” said Mr. Lemoine during his keynote presentation.

“Freer countries receive significantly more foreign direct investment than those with less freedom. Overall, the Freedom Index suggests that a strong commitment to freedom is key to attracting foreign investment,” he added.

The conference brought together stakeholders from various sectors, including government, civil society, business, donors, academia, and think tanks.

The Atlantic Council, a nonpartisan nonprofit organization, aims to promote constructive US leadership in international affairs. Its Freedom and Prosperity Center conducts unbiased, data-based research on the relationship between prosperity and economic, political, and legal freedoms to support sound policy choices.

The Freedom and Prosperity Indexes are two separate indexes that rank 164 countries worldwide according to their levels of freedom and prosperity.

In recent months, Bangladesh’s economy has shown signs of recovery, particularly in export earnings and inward remittances. The volatility in the foreign exchange market has also begun to ease after over a year and a half. However, the Iran-Israel conflict has emerged as a fresh concern, posing a potential threat to the nation’s ongoing recovery efforts.

Businesses and economists have expressed concerns that if the conflict escalates and prolongs, it could have various repercussions on Bangladesh’s economy.

One such impact could be the destabilisation of the energy market and subsequent price fluctuations, akin to what occurred following the Russia-Ukraine conflict in 2022. This could lead to increased burdens on Bangladesh’s oil and LNG import bills due to inevitable price hikes.

They caution that the Red Sea shipping route, already affected by Yemen’s Houthi attacks, could face additional disruptions. This situation could potentially have significant impacts on global supply chains, especially if there are further complications at the Strait of Hormuz which sees one-fifth of global oil production flow through it daily. This could result in increased freight costs and shipping times.

“Further escalation means everything will be difficult for us and many others,” said Azam J Chowdhury, chairman of East Coast Group, a conglomerate engaged in diverse sectors ranging from oil and gas to ocean-going ships, as well as banking and finance, among others.

Azam said the price of oil has already risen by $1 per barrel, and it is likely to further increase if the conflict between Iran and Israel persists. The state-owned Bangladesh Petroleum Corporation (BPC) has generated approximately Tk4,000 crore in profits since implementing the automated monthly pricing formula. However, these profits might not be sustained if prices further increase. Therefore, the pressure on the balance of payments (BOP) will further intensify.

Dr Masrur Reaz, CEO of the private think-tank Policy Exchange of Bangladesh, said an unstable energy market could lead to price escalations and increase import bills. If the government fails to import energy at higher prices, there may be an increase in load shedding and economic losses.

He said the Red Sea route, already experiencing disruptions with ships rerouting via Africa, would further increase shipping time and costs if trade through the Strait of Hormuz is disrupted. This situation could potentially create a crisis for ships due to the additional time required to navigate through the African region.

While neither Iran nor Israel directly hosts Bangladesh’s migrant workers, the repercussions of the conflict will be felt in other Middle Eastern countries, notably Saudi Arabia and the UAE, where hundreds of thousands of Bangladeshis are employed, Masrur said, noting that the war’s impact on tourism and other service sectors in these countries will inevitably affect the livelihoods of Bangladeshi workers residing there.

“In the short term, expatriate Bangladeshis may not lose their current jobs, but new recruitment will likely be halted. As a result, the inflow of remittances will decrease, putting pressure on the balance of payments,” he said.

Masrur added that if the conflict persists for a year or more, Bangladeshis may indeed begin to lose their jobs.

Professor Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue (CPD), reiterated concerns about the rise in energy prices and maritime trade costs.

He said if the conflict escalates, the global economy would suffer negative consequences. Consequently, demand in the USA and EU markets could decrease, with the obvious impact to be felt on Bangladesh’s garment exports.

However, Md Sazzadul Hassan, chairman and managing director of BASF Bangladesh Limited, cautioned against premature conclusions, stating that the outcome depends on how the tension unfolds.

“In general, the ongoing shipping challenges are likely to worsen, and fuel costs may skyrocket,” he said.

Nonetheless, he said, since a large number of Bangladeshis work in the Middle East, any further escalation could potentially impact these workers.

Oil price after Iran’s missile attack on Israel

Iran possesses extensive oil reserves and ranks as the third-largest producer within the oil cartel OPEC. According to CNBC, an American business news channel, any disruption to its ability to supply global markets could result in elevated oil prices. The potential closure of the Strait of Hormuz could further exacerbate this situation.

CNBC reported on Monday that oil prices could surge to $100 per barrel and beyond if renewed fears of a regional war emerge.

“Any attack on oil production or export facilities in Iran would drive the price of Brent crude oil to $100, and the closure of the Strait of Hormuz would lead to prices in the $120 to $130 range,” reports CNBC quoting Andy Lipow, president of Lipow Oil Associates.

Meanwhile, Reuters reports a 1% decrease in oil prices on Monday, indicating the market’s downplaying of the risk of a broader regional conflict following Iran’s weekend attack on Israel.

Brent futures for June delivery dropped by 99 cents, approximately 1%, reaching $89.46 a barrel by 0933 GMT on Monday. Meanwhile, West Texas Intermediate futures for May delivery experienced a decline of $1.05, around 1.2%, standing at $84.61.

Earlier on 12 April, oil benchmarks had risen in anticipation of Iran’s retaliatory attack, with prices touching their highest since October.

The report indicates that the price of each barrel of Iran’s heavy crude oil in March 2024 reached $83.48, marking a $3.14 increase compared to the previous month.

Furthermore, the average oil price of OPEC in March 2024 reached $84.22, reflecting a $2.99 growth compared to the preceding month, as stated in the report.