Macroscope | How China can avoid 2 per cent growth nightmare: cut interest rates, expand money supply and ramp up deficit spending

China’s growth slowdown is reaching crisis point. How bad could it be? Very bad, judging by the weaker signals coming out of China right now. Its 2019 GDP growth rate could end up well outside the consensus range of expectations, which has been between 5 and 7 per cent.

You don’t need to look very far to see where the trouble lies. Vulnerability is written all over the domestic economy – weak car sales, lacklustre property prices, listless consumer confidence, sagging money supply growth and acute stock market pain say it all. Weakness is rife throughout the international economy, too – trade wars, global policy tightening, Germany half way to recession, latent euro troubles, deflation worries in Japan, a political crisis in the United States, credit default risks and a hard Brexit in Britain are all adding up. It’s a mess with no apparent happy ending.

The world is in trouble and China will get sucked in as a bellwether for global trade conditions. Yet Beijing’s policy response so far has been to tinker at the margin, ending up behind the curve and possibly compromising the country’s recovery hopes for years. Conventional wisdom says China’s growth rate for 2019 should only experience a marginal slowdown from 6.5 per cent last year – but this grossly underestimates the scale of the problem. We are all getting sucked into complacency – Beijing included.

A positive result for China’s growth this year would be 5-6 per cent, but current trends suggest the economy will be lucky to come close to that. The trade war with the US is taking its toll – consumer confidence and business optimism both look precarious, casting a dark shadow over China’s domestic demand. The external sector is no better off, given the sudden downturn in global economic confidence and the damage being wrought on world trade flows.

It is hard to fathom why the World Bank and International Monetary Fund are still so relatively upbeat, expecting annual global GDP growth of between 2.8 and 3.7 per cent over the next few years.