Our economic outlook for China
August 19, 2024
Our outlook for year-end 2024
5.1%
Economic growth,
year over year
Sluggish second-quarter growth (0.7% quarter over quarter, 4.7% year over year) was in line with our nonconsensus view. In the second half, we expect the economy to regain some ground and stabilize toward trend growth, with export and manufacturing investment as a tailwind. China has set a goal for full-year 2024 growth “around 5%.” We continue to foresee China growing by 5.1% for the full year, though supply and demand that remain out of balance could challenge that growth’s sustainability.
1%
Core inflation, year over year
The pace of inflation as measured by consumer prices rose by 0.5% year over year in July, above expectations but well below the 3% inflation target set by the People’s Bank of China. Inflation was greater than expected on a month-over-month basis as well, with broad prices up by 0.5%. We expect reflation in 2024 to be mild, with headline inflation of 0.8% and core inflation, which excludes volatile food and energy prices, of just 1.0%.
1.6%
Monetary policy rate
We expect further monetary policy easing following a surprise PBOC rate cut. The PBOC lowered its new policy benchmark, the seven-day reverse repo rate, from 1.8% to 1.7% on July 22, the first such reduction in the rate since August 2023. The PBOC also lowered banks’ loan prime rates by 10 basis points and relaxed banks’ medium-term lending collateral requirements. Vanguard foresees a cut in the seven-day reverse repo rate to 1.6% and a modest reduction in banks’ reserve requirement ratios this year.
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. Vanguard believes that structural mismatches in labor demand and supply, particularly among the youngest workers, may not be easily addressed in the near term and may require additional policy support.
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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