Our economic outlook for China
June 25, 2024
Our outlook for year-end 2024
5.1%
Economic growth,
year over year
A reduced risk of policy complacency after recently announced support for the property sector supports growth. That support, coupled with bright spots in manufacturing, infrastructure investment, and exports, makes China’s official target for growth “around 5%” achievable. We expect growth to hit a soft patch in the second quarter before stabilizing around trend in the second half of the year. However, fundamentals remain fragile, with supply and demand out of balance, which could challenge that growth’s sustainability.
1%
Core inflation, year over year
Pro-growth policy measures could spur a rise in consumer prices, for which there is ample capacity after a brief deflationary period at the start of the year. We expect any reflation to be mild, however, and to depend on a revival in consumer confidence. We foresee inflation remaining well below the 3% target set by the People’s Bank of China (PBOC) given supply-demand imbalances and growth below potential.
2.3%
Monetary policy rate
We expect only modest easing from the current 1-year medium-term lending facility rate of 2.5% given concerns about banks’ net interest margins and the likelihood of a “higher for longer” Federal Reserve. We expect the policy rate to stay lower for longer given the need to sustain a growth recovery and ensure a smooth deleveraging from China’s property overhang.
5.1%
Unemployment rate
We foresee the unemployment rate remaining around current levels over the course of the year, below the government’s 5.5% target. Although the headline unemployment rate should remain stable, growth in jobs and wages is tilting toward the lower-income end of the labor market, which could lead to a lackluster recovery in household consumption.
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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