BOFIT Viikkokatsaus / BOFIT Weekly Review 2015/39
As in our earlier forecasts, the latest BOFIT Forecast for China 2015–2017 sees GDP growth this year still near 7 % p.a., then slowing to around 6 % p.a. in 2016–2017. Fiscal and monetary stimulus measures, as well as the positive terms-of-trade effect stemming from lower prices for energy and other commodities, will support growth over the near term. Securing high growth in coming years will require measured progress in implementation of reform policies so the country can develop new engines of growth. Economic reforms are also needed in resolving China’s existing problems.
The deceleration in China’s economic growth is a natural development, and partly reflects a shift in the growth paradigm from one based on fixed investment and goods manufacturing to one driven by consumer demand and services. Private and public consumption last year accounted for over half of GDP for the first time since 2006. Nevertheless, China’s sky-high level of fixed investment (40 % of GDP) indicates there is still plenty of room to run for structural changes for many years to come. On the demand side, the service sector now accounts for almost half of GDP and plays a major role in supporting employment.
Given the scale of systemic and structural changes in China, they will inevitably force adjustments and cause disturbances. Such disruptions at least partly indicate the economy is evolving in the desired direction. What matters is that reforms proceed despite market upheavals.
While volatility should be expected at this point in the evolution of China’s economy, the seriousness of disruptive shocks should not be understated. Indebtedness in China has risen to where it has become a major economic policy headache for the leadership – and debt, along with the accompanying risks, is increasing. At worst, serious market disturbances could bring reforms to a halt which would cause a reassessment of the country’s development outlook.
Realised GDP growth and BOFIT forecast for 2015–2017
Sources: NBSC and BOFIT.
BOFIT Forecast for China 2015–2017