China’s growth forecast for 2019 raised by IMF despite trade war and global downturn

The US-China trade war will have less impact on the Chinese economy than initially thought, with the International Monetary Fund increasing its growth forecast for the country this year.

The International Monetary Fund (IMF) now forecasts that China’s economy will grow by 6.3 per cent in 2019, up 0.1 per cent on its last prediction. This is despite the fact that the fund downgraded its growth outlook for most major economies, as well as the global economy, amid a series of headwinds.

“China has ramped up its fiscal and monetary stimulus in response to the trade tariffs,” Gita Gopinath, the IMF’s chief economist, said at a press briefing in Washington. “Furthermore, the outlook for US-China trade tensions has improved as the prospect of a trade agreement take shape. These responses have helped reverse the tightening of financial conditions to varying degrees across countries.”

In a bid to limit damage from the trade war, Beijing eased off on its campaign to reduce debt and embarked on a number of cuts to the amount of cash banks need to hold in reserve, in an effort to get more money into the real economy through bank lending. It funded a new round of major infrastructure projects and announced a 2 trillion yuan (US$298 billion) tax cut package.

The IMF endorsed a modest fiscal expansion, if China is to avoid a sharp slowdown, but opposed any large-scale stimulus – something which Chinese leaders have also vocally opposed.

“Excessive stimulus to support near-term growth through a loosening of credit standards, or a resurgence of shadow banking activity and off-budget infrastructure spending, would heighten financial vulnerabilities, reduce future policy space, and raise downside risks to medium-term growth,” it warned in the World Economic Outlook, released on Tuesday.

Instead, “policies should stay focused on deleveraging and rebalancing the economy away from a growth model based on credit-fuelled investment toward one that is more sustainable and led by private consumption”.

The IMF also discouraged China’s continued support of state-owned enterprises (SOEs), which receive the lion’s share of government and bank support. If it is serious about enhancing productivity, China should reduce the footprint of SOEs and further remove barriers to market entry for foreign companies in sectors from telecommunications to banking, the IMF argued.

The Washington-based fund, however, downgraded its 2020 growth forecast for China by 0.1 per cent to 6.1 per cent, saying “the underlying momentum in activity is more subdued”.

The National Bureau of Statistics is due to release the official first quarter economic data next week. A survey of economists by Bloomberg forecast that growth would slow by 0.1 per cent, down from 6.4 per cent in the fourth quarter of 2018, to 6.3 per cent in the first three months of 2019.

Gopinath said there is room for cautious optimism on a gradual turnaround in the Chinese economy, citing the latest manufacturing Purchasing Managers' Index. Purchasing Managers' Index, which showed its biggest increase since 2012. “We are seeing some green shoots there in terms of recovery,” she said. “So there are some positive signs already.”

The IMF, meanwhile, slashed its growth forecasts for most major economies in 2019, while its global growth forecast was also revised down for the second time since October. Global growth is now projected to slow from 3.6 per cent in 2018 to 3.3 per cent in 2019, before returning to 3.6 per cent in 2020.

“This is a delicate moment for the global economy,” Ms Gopinath said. “There are serious downside risks.”

These include the trade war, a loss of momentum and business confidence in the European Union, and softening consumer demand around Asia-Pacific.

“Trade tensions increasingly took a toll on business confidence and, so, financial market sentiment worsened, with financial conditions tightening for vulnerable emerging markets in the spring of 2018 and then in advanced economies later in the year, weighing on global demand,” the report read.

However, it is now looking likely that negotiators from Beijing and Washington will cut a deal to end the trade war sooner rather than later, with US President Donald Trump saying last week that a deal could be reached within four weeks. The IMF, therefore, expects a slight uptick in global growth in the second half of the year.

“Conditions have eased in 2019 as the US Federal Reserve signalled a more accommodating monetary policy stance and markets became more optimistic about a US-China trade deal, but they remain slightly more restrictive than in the Autumn,” the authors wrote.

“If the downside risks do not materialise and the policy support put in place is effective, then global growth will return to 3.6 per cent in 2020,” Gopinath said in the foreword to the latest outlook.

“If, however, any of the major risks materialise, then the expected recoveries in stressed economies, export-dependent economies, and highly indebted economies may not occur. In that case, policymakers will need to adjust.”

The IMF predicts US growth will rise to 2.3 per cent this year, down 0.2 percentage points from January’s forecast, due to the impact of the US government shutdown earlier this year and the phasing out of fiscal stimulus since the end of 2017.

Euro zone growth was revised down by 0.3 per cent, to 1.3 per cent due to issues including the impact of new diesel emissions standards on Germany’s car industry, the impact of trade tensions on exporting nations and uncertainty created by Brexit.

“If the ongoing trade truce between the US and China is resolved with a rollback of tariff increases enacted in 2018, rising business confidence and financial sentiment could lift growth above this baseline forecast,” the IMF report said.