THE INTERNATIONAL MONETARY Fund has left its forecast for China’s GDP growth this year at 6.8%. That is broadly unchanged from its January update, though go down to two decimal places and there is a slight lowering of the forecasts. A year ago, the Fund was forecasting 7.3% growth for this year.
The number for the first quarter has come in at 7.0% year-on-year, down from 7.3% for the fourth quarter of last year and its slowest pace since the 2008 global financial crisis. The official target for the full year is ‘about 7%’.
The new edition of the Fund’s World Economic Outlook says Beijing’s attempts to rebalance the economy will continue to be a drag on growth, though managing the glide path of slowing the economy to a more sustainable long-term growth rate is the plan. “The authorities in China are now expected to put greater weight on reducing vulnerabilities from recent rapid credit and investment growth. Hence the forecast assumes a further slowdown in investment, particularly in real estate,” the IMF says.
Its forecast for 2016 remains at 6.3% (again, a slight softening if you go to more decimal places). The effect of that will be felt in commodity-exporting countries and China’s main trade partners — and much more widely if China’s economy slows faster than that, the so-called ‘hard landing’.
The question domestically is the extent to which structural reforms and lower oil and other commodity prices will expand consumer spending, and thus moderate the pace of the overall slowdown. On the answer to that question lies the extent to which Beijing will need to make a monetary policy response, either by cutting interest rates or lowering banks’ reserve requirements ratios.
China has room to ease. Cheaper commodities, including oil, and the appreciation of the currency is keeping inflation low. The IMF forecasts consumer price inflation to be 1.2% this year and to increase gradually into 2016. However, as the Fund notes, “striking a balance between reducing vulnerabilities, supporting growth, and implementing reforms remains challenging”.
Giving market mechanisms a more decisive role, eliminating distortions, and strengthening institutions is key. The Fund underlines the need for financial and state-owned enterprise reforms to increase the efficiency of resource allocation and reforms in the pension system and other social safety nets to shift the composition of growth toward domestic consumption.
The need for such reforms are the more urgent because the demographics that underpinned the productivity gains that drove double-digit rates of growth for three decades are now moving against China more strongly than in any other leading emerging economy.