THE OECD HAS raised its forecast for China’s GDP growth this year by one-tenth of a percentage point from the 6.4% forecast it made last November. It has also raised its 2018 projection by one-fifth of a percentage point, to 6.3%. The 2017 forecast puts it squarely in line with the new official target of ‘about 6.5%’.
Its nutshell summary is:
Growth in China is expected to edge down further by 2018 as the economy manages a number of necessary transitions, including shifting towards consumption and services, adjustment in several heavy industries, working off excess housing supply and ensuring credit developments are sustainable. Demand is being supported by very expansionary fiscal policy, including via policy banks, which in turn is boosting private investment and trade. Producer price inflation has picked up strongly, but consumer price inflation remains low.
The OECD also notes that the rapid growth of private-sector credit and the relatively high level of indebtedness by historic norms is a key risk. Non-financial companies’ high debt levels provide particular vulnerability to a rapid rise in interest rates or unfavourable demand developments, it says. The report also advocates spending be directed at health and education and directed away from adding to financial risks.
The significant uncertainty about the future direction of trade policy globally is a key theme in the report, which makes the self-evident point that a roll-back of existing trade openness would be costly. Around one in seven jobs in China is linked to participation in global value chains.
If the Organization for Economic Co-operation and Development (OECD) has pared its growth forecast for the world economy, then it has a taken a hatchet to that for China. In the latest update to its economic outlook, the OECD now says it expects China’s GDP to grow at 7.8% this year, no faster than in 2012. It has pushed back its forecast for any pick-up in the pace until next year, when it forecasts the economy will expand by 8.4%. In March, it had forecast 8.5% GDP growth this year and 8.9% next.
The OECD forecast is a sharper correction than that just made by the International Monetary Fund, which cut its forecast for this year to 7.75% growth from 8%, citing the overall weakness of the world economy and the effect that was having on China’s exports. The OECD points the finger more at a slowdown in capital formation in the first quarter and swings in inventories. Given China’s own recently published monthly economic indicators the downward revisions by both multilateral institutions is scarcely a surprise, though the scale of the OECD’s cut did raise an eyebrow as it is usually the most bullish on China.
The OECD sees scope for more relaxed fiscal and monetary policy in the second half of the year to stimulate growth as long as inflation stays low, but notes that disinflationary pressures have recently abated. It also recognizes the risks lurking in the property market and in shadow banking. Those limit policymakers’ freedom of action. The organization also calls for a detailed timetable to implement structural economic reforms, notably interest rate deregulation, increased labour market flexibility and land reform.
The OECD’s latest economic outlook sees the slowdown in the growth of China’s economy reversing later this year as fiscal stimulus and monetary easing kick in. It forecasts that GDP growth for the year will be 8.2%, down from 2011’s 9.2%, but the second half momentum will carry through to bring 9.3% growth next year. If the slowdown continues for longer than expected, should, say, the worst outlook for the eurozone come to pass, the OECD says Beijing should bring forward infrastructure spending planned under the current five-year plan.
Inflation is seen as falling below 3% next year. The current account surplus is expected to continue to shrink, to an estimated 2.3% of GDP this year and to 1.7% next year. 2011’s surplus was 2.8% of GDP.
The OECD also calls for more competition in the banking sector, including a start to deregulating interest rates, first for loans and then for deposits. It wants a deposit insurance scheme set up and more private capital allowed into the sector. To expand a more open market for the currency it says capital outflows should be liberalized. This is all pushing at an open door, or at least the OECD adding its weight to the shoves of the reformers. The question, as ever, is timing.
“Better educational outcomes are a strong predictor for future economic growth,” says OECD Secretary-General Angel Gurría. Put your money on Shanghai, then. The city scored higher than any of the 70 economies included in the newly published survey of reading literacy among 15-year olds by the OECD’s Programme for International Student Assessment (PISA).
China, as a whole was not included in the survey (it is not a full OECD member), but Hong Kong would have come third in the country rankings behind South Korea and Finland, the longtime number one that was pushed into second place this time. The survey also found that girls read better than boys in every country, which is no surprise, but quantifies the difference, which is, at “an average of 39 points, the equivalent to one year of schooling.”
Shanghai also topped the table in maths and science.
More than one-quarter of Shanghai’s 15-year-olds demonstrated advanced mathematical thinking skills to solve complex problems, compared to an OECD average of just 3%.
One in seven of Shanghai’s 15-year olds achieved the highest levels of proficiency in all three of reading, maths and science, compared to one in twenty five across the OECD as a whole. It is a bit chalk and cheese to compare educational achievement in a city’s schools with those of a country, this is the first time Shanghai has been assessed and it is unclear how the sample of 5,000 tested children was chosen, so we are duly measured in our reaction. The key question is what makes the city’s schools so effective. The analysis that accompanies the survey’s results is too general to provide an answer. Yet, as the survey notes, high levels of skill are critical to innovation, so being top of the class should add up to something in future.
The OECD’s monthly snapshot of the outlook for the country’s economic activity over the coming six months, its composite leading indicators index (left), has been looking grimmer for some months. Its latest number, for September, has fallen below the baseline 100, implying, the OECD says, “that the level of industrial production will fall below its longer-term trend”. Put another way, the economy is going to slow. At 99.6 the index is at its lowest level since April 2009.
The OECD’s growth outlook is in line with the latest forecast for China’s economy from the World Bank, which expects growth slowing from 10% this year to 8.7% in 2011. The silver lining in the OECD’s numbers is that they show continuing growth in China’s export markets in the U.S., Japan and Germany.