BOFIT news 22 April 2024 1:00 PM

BOFIT Forecast for China 2024–2026 is published: Productivity gains key to China maintaining growth

The latest forecast from BOFIT, the Bank of Finland’s Institute for Emerging Economies, sees structural and cyclical factors bringing down economic growth over coming years. Growth is expected to slow to roughly 4 % this year and then to 3 % p.a. in 2025 and 2026. The lack of reliable Chinese statistical data makes detailed assessment of the situation challenging.

China’s official figures show GDP rose by 5.2 % last year. Alternative calculations by BOFIT, however, suggest that GDP growth has underperformed official estimates in recent years. Economic growth in the first months of this year was fairly brisk (officially 5.3 % in the first quarter) thanks to strong industrial growth. No large changes to the outlook for economy overall have occurred since our October 2023 forecast. We continue to anticipate about 4 % growth this year. Growth is expected to slow to around 3 % in 2025 and 2026. The degraded quality of Chinese statistical reporting makes it increasingly difficult to evaluate economic conditions and adds uncertainty to our forecast.

China’s economic growth is constrained by an ageing population, weak business environment and the Communist Party’s ever-tightening grip on the economy. New real estate construction and apartment sales have declined substantially, and relations between China and its trading partners cloud the outlook for export industries. No significant progress in these areas is expected during the forecast period. China’s high debt-to-GDP ratio and the weak public sector create a dilemma for government by limiting its room to manoeuvre in the fiscal policy sphere and the ability of the financial sector to cope with risk. Reforms that lift total factor productivity and increase domestic consumption would enhance growth.

"China is currently attempting to shift its economic policy emphasis to manufacturing, particularly fields involving advanced technologies. With the real estate crisis, the government is forced to look beyond construction investment for new engines of economic growth. Measures that increase productivity are a welcome development in efforts to support economic growth.” notes Riikka Nuutilainen, a senior economist at BOFIT.

An increase in state-designated innovation projects comes, however, with a significant risk of wasteful investment and further increases in overcapacity that already plague many branches. Since domestic demand remains tepid, increases in capacity will likely support the already excellent price competitiveness of Chinese exporters.

“Increased production of cheap exports could exacerbate already heightened tensions between China and its trade partners,” Nuutilainen observes.

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FOR FURTHER INFORMATION

Senior Economist Riikka Nuutilainen
tel. +358 9 183 2518 / riikka.nuutilainen(at)bof.fi

Head of BOFIT Iikka Korhonen
tel. +358 9 183 2272 / iikka.korhonen(at)bof.fi