BOFIT Forecast: Escalating trade war to slow Chinese growth and aggravate economic imbalances

BOFIT expects China’s economic growth to slow over the next three years. The forecast sees China’s GDP growth remaining around 3½ percent this year and next year, before slowing to around 3 percent in 2027. High uncertainty persists throughout the forecast period. Official growth figures are likely to be higher than reality, and statistical deficiencies make it difficult to assess China’s actual economic performance.

Besides the structural factors restraining growth, China faces a lack of consumer confidence and on-going problems in its real estate sector. Escalation of the trade war with the US significantly heightens uncertainty and negatively impacts growth. BOFIT senior economist Riikka Nuutilainen explains: “President Trump’s policies have caused a shock to the global trade system. The situation for China this time around is much more difficult than in Trump’s first term.”

China’s government is expected to increase economic stimulus measures to support growth, but with the effect of also increasing already large public sector imbalances and their associated risks.

The end of export-driven growth

Output growth in recent years has outstripped growth in domestic demand, with excess going to exports. Strong export demand clearly supported China’s economic growth still in the first quarter of this year. “Unfortunately,” Nuutilainen notes, “this benign situation won’t last much longer. China’s export outlook is further dimmed by lower global demand growth and increased worries among many trading partners about their over-dependence on China.“ The weak export outlook will likely be reflected in China’s domestic demand as the export sector is still an important job-provider and the most dynamic part of the Chinese economy,” adds Nuutilainen.

China this year remains committed to its ambitious “about 5 %” GDP growth target. Achieving growth anywhere near that will require more stimulus measures than currently announced. The country has been running large public sector deficits for years and government indebtedness has soared. “Stimulus at this point exacerbates imbalances in the Chinese economy, making it more vulnerable to shocks," states Nuutilainen.

The forecast is available at https://www.bofit.fi/en/forecasting/latest-forecast-for-china/.