THE ORGANISATION FOR Economic Co-operation and Development (OECD)—the rich countries’ think tank—has trimmed its forecast for China‘a economic growth this year.
Its latest update to its economic outlook puts GDP growth at 7.8%, 0.2 of a percentage point down from its December forecast. Its 2022 forecast is unchanged at 4.9%. As usual, the OECD’s forecasters take a slightly steelier-eyed view than their counterparts at the IMF or World Bank, but the direction of travel is similar.
Overall, the OECD sees most of the world‘a largest economies recovering from the pandemic this year faster than previously expected. This will pull back some of the export growth that helped China be one of a tiny handful of economies that grew last year.
Government stimulus played an even more important role. Monetary stimulus is already being cut back and the OECD expects fiscal stimulus to be unwound this year, The downside risks to its forecast remain primarily pandemic-related: vaccine rollout hiccups and virus variants lessening vaccine effectiveness with either or both necessitating renewed containment measures.
The OECD also warns, however, of what it puts delicately as a ‘repricing in financial markets’.
That is also a risk even if the baseline forecast holds. Expectations of future inflation are rising globally. China’s rapid rebound has pushed up prices for food and metals. Oil prices, too, have moved towards the top of their recent range. Temporary supply bottlenecks such as shipping and semiconductors are contributing as well.
However, inflation is low and globally real interest rates remain negative — unlike in the ‘taper tantrum’ in 2013. Central banks are acutely aware this time round of the dangers of losing control of markets. Nonetheless, the People’s Bank of China would be particularly concerned about a sustained rise in interest rates because the pandemic brought a pause to their necessary work of deleveraging the economy.
The work reports presented by both the finance ministry and the National Development and Reform Commission, the top economic planning agency, during the two meetings earlier this month highlighted the priority being given this year to tackling ‘hidden’ local government debt.
Although the OECD’s latest update does not touch on this this, China’s post-pandemic recovery has been unbalanced in that it has been infrastructure investment and export-led with domestic consumption lagging. Righting that wil require addressing structural reforms that the OECD has called for in the past such as improved social protection and a more equitable provision of public services to release savings for consumption.