THE INTERNATIONAL MONETARY FUND has trimmed its forecast’s for China’s GDP growth this year by one-fifth of a percentage point to 1%. That is in line with the most recent estimates by its sister organisation, the World Bank, although both are more optimistic than the OECD.
The Fund has reduced its forecast for growth next year by a full percentage point to 8.2%. That cut reflects the likely drag of a world economy that the Fund expects to contract by 4.9% this year, against the 3% contraction it forecast in April.
Its newly published update to its World Economic Outlook says:
The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast.
Given China started to reopen in April, the Fund is expecting fourth-quarter growth for the Chinese economy to be 4.4% higher than in the corresponding quarter of 2019 thanks to government stimulus.
Policy has focused on vulnerable firms and households, including through the expansion of the social safety net, public health services and digital infrastructure. The risk remains that millions of households will fall through the gaps and will be left considerably poorer than before the pandemic. Consequent worries on the part of authorities about social unrest will thus persist, albeit at a low level and likely localised.
The relatively better economic performance of China than most other countries can also be found in this list of factors identified by the IMF:
- the evolution of the pandemic and the effectiveness of containment strategies;
- variation in economic structure, eg, dependence on severely affected sectors, such as tourism and oil;
- reliance on external financial flows, including remittances; and
- pre-crisis growth trends.
The risks, as the IMF notes, are mostly to the downside, but not exclusively. The recovery in investment and services in China through May was stronger than anticipated, offering at least one example of economic normalisation proceeding faster than expected. Progress in developing vaccines and therapeutics may come to the economy’s support. Changes in production, distribution and payment systems forced by the pandemic could spur productivity gains from accelerated digitalisation and environmental benefits from a switch from fossil fuels to renewables.
However, there are more dark clouds than silver linings, from the possibility of a second global wave of infections, of which the recent Beijing cluster may be prologue, to global trade recovering more slowly than expected. The United States could play a big part in both, but the darkest cloud, as the Fund notes without expressing it in such terms, is escalating tensions between Washington and Beijing on multiple fronts.