Our economic outlook for China
October 22, 2024
Our outlook for year-end 2024
4.9%
Economic growth,
year over year
Although stimulus introduced since the end of September is likely to strengthen growth momentum, we believe it will come too late to meaningfully lift full-year growth. We have revised our forecast for China’s full-year 2024 economic growth from 5.1% to 4.9%. We anticipate that the stimulus will nudge fourth-quarter growth higher, keeping full-year growth near the government’s target of “about 5%.” China’s economy gained some momentum in the third quarter. Year-over-year real GDP expanded by 4.6% on a seasonally adjusted basis, just above expectations although below second-quarter growth of 4.7%, owing to challenging year-earlier comparisons.
1%
Core inflation, year over year
Price trends underscore the urgency of stimulus for China’s economy. The pace of headline inflation slowed to 0.4% year over year in September, down from 0.6% in August, and much of that was attributable to a rise in food prices. Core inflation, which excludes volatile food and energy prices, was just 0.1% in September, down from 0.3% in August. Producer prices fell a greater-than-expected 2.8% year over year, marking two years of declines attributable to oversupply in the manufacturing sector. We expect reflation to be mild, with headline inflation of 0.8% and core inflation of just 1.0% for all of 2024.
1.4%
Monetary policy rate
The People’s Bank of China (PBOC) cut its policy rate, the seven-day reverse repo rate, to 1.5% from 1.7% on September 24 as part of a broad easing package. Other steps included a 50-basis-point reduction in banks’ reserve requirement ratios and cuts to existing mortgages averaging 50 basis points to align them with new mortgage rates. The PBOC additionally said it would establish a 500 billion yuan (USD 71 billion) fund for asset managers, brokers, and insurers to buy stocks.
On October 21, the PBOC additionally cut reference rates for consumer and business loans. It cut the one-year loan prime rate from 3.35% to 3.1% and the five-year loan prime rate from 3.85% to 3.6%.
5.1%
Unemployment rate
The unemployment rate fell to 5.1% in September from 5.3% in August. We believe that structural mismatches in labor supply and demand, particularly among younger workers, may not be easily addressed in the near term and could require additional policy support. We foresee the unemployment rate remaining around current levels the rest of the year.
What I’m watching
The mixed impact on global goods prices from China's uneven recovery
The idea that China is “exporting deflation” doesn’t hold globally. Although its excess manufacturing capacity amid tepid domestic demand helps lower goods prices in the U.S. and the euro area, China’s booming manufacturing and infrastructure investments drive up energy and industrial metals prices, which especially affects commodities producers such as Australia.
Grant Feng,
Vanguard Senior Economist
Notes: We use China’s export prices as a proxy for the impact of excess capacity and China’s fixed asset investment as a proxy for the impact of investment demand. We expect a 6% drop in export prices this year and a 5.5% increase in fixed asset prices. We use a vector autoregressive model incorporating each economy’s output gap, policy rate, and goods price inflation, and China’s export prices and fixed asset investment to estimate China’s spillover to goods inflation.
Source: Vanguard calculations using data from CEIC as of June 8, 2024.
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