OECD Leaves Its China Growth Forecast Unchanged

THE OECD’S LATEST update to its Economic Outlook, published today, leaves its forecasts for China’s growth rate for this year and next unchanged from its May projections of 8.5% and 5.8%, respectively.

By comparison, for the G20 countries, the OECD is forecasting 6.1% growth this year, down 0.2 of a percentage point from its previous forecast, and 4.8% for 2022, up 0.1 of a percentage point.

In passing, we should note that China is not a member of the OECD, although it has a participatory working relationship with it. Thus, China does not get the detailed discussion in the OECD’s commentary on its Economic Outlook that the International Monetary Fund would give it.

That said, the OECD’s latest numbers would put China pretty much back to its pre-pandemic growth path. However, they stand in contrast with some recent suggestions that economic growth is slowing more rapidly amidst the turmoil and uncertainty caused by the reining-in of the tech sector and wealthy entrepreneurs under President Xi Jinping’s emerging ‘common prosperity’ drive.

Growth laboured in the second quarter and may prove to have been flat or close to it when the third-quarter GDP figures are published on October 18. Recent high-frequency economic indicators covering August are pointing to a sharp slowdown in retail sales and falling property prices in the wake of last year’s measures to lower the debt levels of real-estate developers. Localised lockdowns to enforce zero-tolerance of Covid-19 transmission will also disrupt growth.

The OECD does note signals of slowing business output in China, including the softening of purchasing managers’ surveys since May, suggesting some moderation in the pace of the recovery, although at levels consistent with continued growth. This softening was reflected in other Asia-Pacific economies but more marked than elsewhere in the world.

At this point, the official growth target of ‘above 6%’ does not appear at risk. However, the critical near-term uncertainty remains the extent to which the Delta variant raises the risks of repeated or persisting lockdowns, with the disruption to domestic demand and supply chains that implies.

China has already seen a broad-based rise in its export prices. This reflects capacity constraints, supply disruptions and rising input costs from higher global commodity prices, half as high as a year ago. Amplified by the tripling of international shipping costs this year, that will weigh on global economic recovery and thus China’s growth.

On the upside, the OECD sees inflation in China moderating this year due to domestic food prices declining more sharply than producer prices are rising. It is forecasting consumer price inflation falling to 1.2% this year, from 2.5% last year, but rising to 2.2% in 2022, although that is 0.2 of a percentage point less than May’s forecast.

As with all economic forecasts, significant uncertainty remains around how the pandemic will evolve, the global pace and spread of vaccinations and containment measures affecting the reopening or closing of economies. In China’s case, there is the added uncertainty of a fragile real estate market and the potential debt crisis lurking behind it.