- The IMF says China’s old economic model of relying on real estate investment has gone “overboard” and the government needs to consider boosting consumption to boost economic recovery.
- In its October update of its World Economic Outlook, the IMF lowered its forecast for China’s economic growth rate in 2023 from 5.2% to 5%. The forecast for 2024 was also lowered from 4.5% to 4.2%.
- Some economists are more bearish than the IMF on China’s recovery, believing the pace of growth in China’s economy will slow further this year.
The International Monetary Fund says China’s old economic model of relying on real estate investment has gone “overboard” and the government needs to consider boosting consumption to spur economic recovery.
IMF Asia and Pacific Director Krishna Srinivasan said the slump in real estate was the main reason for China’s economic slump. “There has been no comprehensive response to this issue, weighing on both investment in the real estate sector and consumer confidence.”
China is trying to rebalance its economy to focus more on consumption-led growth, but demand remains weak and is not growing as rapidly as before the pandemic.
“While we might have expected a very strong recovery in consumption after China reopened, that was undermined by the failure to restore confidence in the real estate sector,” Srinivasan said. “A lot of the wealth is in the real estate sector and that is still unresolved.”
In its October update of its World Economic Outlook, the IMF lowered its forecast for China’s economic growth rate in 2023 from 5.2% to 5%. The forecast for 2024 was also lowered from 4.5% to 4.2%.
Slowing growth in China is a “key risk to the global economy,” the report said.
The IMF expects global growth to slow to 3% this year from 3.5% in 2022, and further decline to 2.9% in 2024.
“Growth remains slow and uneven, and global inequality is widening. The global economy is limping rather than sprinting,” the fund said.
Consumption remains sluggish
Some economists are more bearish than the IMF on China’s recovery, believing the pace of growth in China’s economy will slow further this year.
“The IMF’s view is not that pessimistic,” said Erica Tay, head of macro research at Maybank.
He explained that the bank has lowered its forecast for China’s growth this year to 4.8% because it does not see the same drivers that drove the country’s growth so strong in the first half of the year.
“We are concerned about consumption in the coming quarters. Revenge spending has already started to fade and we expect consumer spending to settle at a lower level than before the pandemic,” Tay told CNBC.
Mr. Tay pointed out that there were signs of “revenge travel fatigue” during China’s long weekend “Golden Week” in the first week of October.
Maybank expects the country’s consumer sector to grow by around 6% this year and around 4% in 2024.
“Durable goods consumption is much lower than expected as people feel anxious about their future. So why buy a car when you don’t know what’s going to happen next month? .Why buy a house when you don’t know what’s going to happen next year?” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis.
This is not just an economic scar from the pandemic, she said: “This is all structural. When the economy gets older, we spend much less and we don’t have great expectations about the future.” I did.
In India it’s a different story
In contrast, the fund expects India’s economy to grow 6.3% in 2023, up from its previous forecast of 6.1%.
“India is on the map. There is a lot of pent-up demand and sentiment is very positive. There is a feeling that India is back at the forefront and media propaganda is also helping consumption,” Garcia said.・Mr. Herrero said.
The IMF maintained its forecast for India’s 2024 growth rate of 6.3%, but economists said the country faced significant headwinds.
“A widening current account deficit, resurgent inflation and rising geopolitical tensions will be major headwinds for India,” García Herrero warned.