Beijing, September 12, 2023 – A recent Reuters poll of economists has revealed that China’s economy is anticipated to grow at a slower rate than previously expected for both this year and the next. The primary factor contributing to this economic deceleration is the ongoing crisis in the property market, a linchpin of China’s growth for years.
China, the world’s second-largest economy, has been wrestling with economic challenges following a brief post-COVID recovery period. Massive debt accrued over decades due to extensive infrastructure investments and a persistent property downturn has not only posed a domestic risk but also a global economic threat.
Approximately 70% of household wealth in China is tied up in the beleaguered property market, which, coupled with rising youth unemployment, feeble consumer demand, and a hesitancy among struggling private firms to invest, presents a formidable challenge for policymakers in Beijing striving to revive economic growth.
Julian Evans-Pritchard, Head of China Economics at Capital Economics in Singapore, pointed to the property sector as the primary culprit behind the economic slowdown, asserting, “The original source of growth has since dried up and won’t be returning,” and suggested that the deceleration might continue.
The Reuters poll, conducted from September 4 to 11 and involving 76 analysts from both within and outside mainland China, predicts that China’s economy will grow by 5.0% this year, down from the 5.5% forecast in July. Forecasts among the analysts ranged from 4.5% to 5.5%, indicating a consensus of a downward trajectory.
While most economists lowered their growth outlook for this year and the next compared to the previous survey, the reductions were relatively modest, hinting at the possibility of further downgrades in the future.
Some experts even cautioned that the government’s growth target of around 5% for this year might be missed, as the stimulus measures introduced by Beijing may not suffice to stabilize the economy.
Despite recent improvements in certain economic indicators, some argue that more substantial policy support is needed, particularly for the distressed property sector, which constitutes roughly a quarter of China’s economy.
The forecasts suggest that China’s economic growth is expected to slow to 4.5% next year and 4.3% in 2025. After a 6.3% expansion in the last quarter, the economy is projected to grow by just 4.2% in the current quarter, followed by 4.9% in the subsequent one, and a further dip to 3.9% in the first quarter of 2024.
Bingnan Ye, a senior economist at China Merchants Bank International in Hong Kong, expressed concerns about the potential depth of the economic slowdown, noting that “this slowdown could be just the tip of the iceberg.” In particular, he emphasized the possibility that “family consumption could rise more gradually than many assume,” alongside ongoing trade tensions between the United States and China and the diversification of supply chains away from China.
The majority of economists surveyed indicated that the risks to their GDP growth forecasts for 2023 and 2024 are skewed to the downside.
In addition to the growth outlook, economists also revised their consumer price inflation forecasts downward to 0.6% for this year and 1.9% for next year, compared to the previous expectations of 1.1% and 2.1% in the July survey.
Despite low inflation, it is expected that the People’s Bank of China will maintain its key interest rates throughout the remainder of this year.
However, when asked about the likelihood of an aggressive economic stimulus package from Chinese authorities, over three-quarters of the economists surveyed (17 out of 21) expressed skepticism. Teeuwe Mevissen, a senior macro strategist at Rabobank in the Netherlands, explained, “About 85% of expenses are covered by local governments, who have a lot of debt. Due to this, they are unable to implement effective stimulus measures without further damaging their already precarious finances.”
Solutions: In light of these challenges, Chinese policymakers may consider a multi-faceted approach to address the economic slowdown. This could include targeted measures to stabilize the property market, stimulate consumer spending, and encourage private-sector investment. Additionally, addressing debt sustainability and supporting local governments in managing their finances could be essential steps to bolster economic stability in the longer term.
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