Editor's note: Jimmy Zhu is the chief strategist at Fullerton Research. The article reflects the author's opinions and not necessarily the views of CGTN.

China's fourth-quarter GDP results and December's slew of major economic data beat most economists' expectations, paving the way for a more solid growth outlook in 2023, particularly in the consumption sector.

GDP grew 2.9 percent in the fourth quarter, while most analysts had expected a reading of below 2.5 percent. China's GDP expanded 3.0 percent in 2022. The much better-than-expected improvement has fueled optimism that a recovery will come sooner and more strongly than earlier thought.

Of all the major economic data for December, retail sales drew the most attention as this sector is the most sensitive to changes in COVID policy. Retail sales fell 1.8 percent last month, a big improvement from November's 5.9 percent contraction. The rapid recovery points to a resilient consumption outlook, which will be a crucial engine to support the Chinese economy this year.

The data showed that final purchases of goods and services by households accounted for 65.4 percent of China's GDP in 2021 and could increase in the coming years given the deteriorating external profile.

That said, with many trading partners teetering on the brink of recession, China is likely to rely more on domestic demand to revive growth activity this year. The World Bank recently forecast just 0.5 percent expansion in the United States in 2023, while the euro area was expected to see flat growth.

Consumption will lead the way

The good news is that experience in other economies since the loosening of COVID restrictions points to a potentially substantial growth rate in consumption in China this year. We cite Singapore and Vietnam as two countries that had previously adopted stringent COVID restriction rules and didn't deploy massive monetary and fiscal stimulus as many Western economies did at the beginning of the pandemic.

That is why consumer behavior in Singapore and Vietnam after the easing of COVID rules may serve as a reliable reference to gauge the outlook for consumption in China. When Singapore eased most of its COVID restrictions in March 2022, its consumption immediately jumped during the following months.

Singapore's retail sales growth accelerated to 18.2 percent in May 2022 from a contraction of 3.4 percent in February.  A similar pattern was seen in Vietnam, where retail sales growth surged to 50.2 percent in August from a year earlier. That compared with just 1.1 percent improvement when the country was fully opened at the start of last year.

The experiences of Singapore and Vietnam in 2022 thus suggest a bright consumption outlook for China in 2023.  After a contraction in retail sales in the last three months of 2022, China may see a sharp rebound in consumption activity in the coming months driven by pent-up demand. That would be similar to what happened in 2020.

When the pandemic struck provinces and cities in early 2020 local governments took bold measures to mitigate the spread. As a result, consumption was hit hard in the first four months of the year. However, retail sales recovered quickly and sector growth moved into positive territory in August 2020.

We expect momentum in consumption to improve meaningfully from March onwards, when the pandemic's impact on local social activities should start to become negligible. Stocks in the consumer discretionary sector of the Shanghai Composite Index have rallied about 6.5 percent since the start of the year. They so far have largely outperformed the overall benchmark, after falling 21.6 percent in 2022.

Market participants are always forward-looking, and the price reaction suggests they are betting on a huge domestic consumption rebound, pushing retail-related stocks to their biggest January gain since June.

Sentiment in private sector improving

Not only is consumer sentiment improving, some earlier data shows that manufacturers have also become more confident about the outlook after China started easing COVID restrictions in late 2022.

The December reading for the Caixin manufacturing PMI, a survey that focuses more on the private sector, was 2 percentage points higher than the official reading, suggesting that confidence among private companies is getting better.

Improvement in sentiment in the private sector would be seen as another positive sign to underpin consumption activity this year. Private-sector employment may account for around 80 percent of the entire Chinese labor market.

China's survey showed the unemployment rate in urban areas fell to 5.5 percent last month from 5.7 percent in November. The country's overall purchasing power is expected to get a major boost if the business environment in the private sector continues to improve.

Looking ahead into 2023, our base case scenario is for consumption to expand 6.8 percent, driving full-year GDP growth to around 5.3 percent. Even in the face of external challenges such as slowing demand in developed economies and high global interest rates, robust domestic demand should be able to cushion those shocks and help the Chinese economy grow at a much faster pace this year than in 2022.