The global economy and China: What to expect in the new year and beyond
Updated 15:31, 26-Jun-2023
Steven Alan Barnett
The global economy and China: What to expect in the new year and beyond

The global economy and China What to expect in the new year and beyond.mp3


Editor's note: Decision Makers is a global platform for influential leaders to share their insights on events shaping today's world. Steven Alan Barnett is the International Monetary Fund's senior resident representative in China. The article reflects the author's opinions and not necessarily the views of CGTN.

Last year was challenging for the global economy. Inflation was too high and growth was too low. Growth in China was also weak amid multiple COVID-19 waves. After a challenging 2022, however, we expect China's growth to rebound strongly and contribute a quarter of global growth. China's rebound is welcome amid slowing global growth. The developments, outlook, and policy challenges for the world and China are elaborated below.

The global economy has not fully recovered from the pandemic. Last year, global GDP was still some 3.5 percent below our pre-pandemic forecast. Rather than making up lost ground, the global economy fell further behind in 2022. We estimate global growth was only 3.4 percent, which is below the historical (2000-2019) average of 3.8 percent. Two key factors behind this are rising inflation and the slowdown in China.

First, rising inflation. Global inflation reached 8.8 percent last year. In response, central banks around the world tightened monetary policy to tame inflation. This is the right policy and is working. Thus, we forecast inflation to steadily fall to 4.3 percent in 2024.

Tighter monetary policy works, however, by slowing the economy. This is one reason we expect global growth this year to be even worse than last year. Specifically, to fall to 2.9 percent in 2023 before rising modestly to 3.1 percent in 2024. But historical experience is clear: Price stability is a pre-condition for sustainable growth. And, importantly, it is ultimately less costly to bring inflation down sooner rather than later.

China's growth story is different. Last year, growth in China slowed as a result of the triple headwinds of COVID-19, struggles in the real estate sector, and slowing external demand. At 3.0 percent, growth in 2022 beat market expectations.

In contrast to the global outlook, we expect a sharp rebound in China this year. We forecast growth to rise to 5.2 percent, notwithstanding slower external demand and continued challenges in the real estate sector. The key development is the faster-than-expected change in COVID-19 policies and subsiding COVID-19 waves that are fueling a resumption in economic activity. Uncertainty around the outlook is higher than usual. Key risks relate to COVID-19 and real estate. Regarding real estate, the challenge is to continue to bring the housing market more in balance, while, at the same time, preventing a disorderly adjustment. The latter would require dealing with problems related financial stress in some developers and the stock of sold but unfinished housing.

The Lianyungang Port in east China's Jiangsu Province, January 18, 2023. /CFP
The Lianyungang Port in east China's Jiangsu Province, January 18, 2023. /CFP

The Lianyungang Port in east China's Jiangsu Province, January 18, 2023. /CFP

We also updated our medium-term forecasts for China. We recently published our annual report on China, which covers in detail recent developments, the outlook and policies. In that report, we marked down our medium-term growth forecast for China to just below 4.0 percent. This reflects our assessment of weakening productivity growth amid insufficient growth-enhancing structural reforms.

The good news is that with comprehensive reforms, higher potential growth is attainable for China. Such reforms include measures to boost productivity, especially through market enhancing reforms that foster private sector development, lifting retirement ages to increase labor supply, and removing local protectionism.

China is the world's second largest economy in U.S. dollar terms. With the Purchasing Power Parity (PPP) weights that we use to aggregate global GDP, it is already the world's largest economy. With the global economy still struggling to recover from the pandemic, robust growth in China over the medium term would provide a needed and welcome lift to world growth.

Another needed and welcome lift would come from strengthened international cooperation. The world economy is at a much greater risk of fragmentation that could undo decades of progress from economic integration. This risk must be avoided and replaced with a renewed spirit of international cooperation. In the economic sphere, three priorities for cooperation are trade, debt and climate action.

Trade, until recently, has been an important engine of growth. It can be again with efforts that roll back distortionary subsidies and trade restrictions imposed in recent years; strengthen the World Trade Organization (WTO), including new market-opening agreements; and, where helpful, conclude plurilateral agreements among subsets of WTO members. In addition, countries should carefully weigh the costs, at home and abroad, of "national security" measures on trade and investment.

On debt, vulnerable countries need the help of the global community. Some 60 percent of low-income countries are in or close to debt distress. Another 25 percent of emerging markets are at high risk and facing default-like borrowing spreads. We have seen progress in this area, including agreement on the G20 Common Framework for Debt Treatment. Making the process more certain and faster would serve the interest of both creditors and debtors.

Last but not least, is climate action. Collective action is vital to address the climate crisis. The COP27 agreement to set up a Loss and Damage Fund for the most vulnerable countries shows progress is possible. More is needed to speed the green transition, including countries swiftly implementing creditable mitigation policies, international coordination on carbon pricing or equivalent policies, and global cooperation to build resilience.

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