21st Century Economic Report reporter Zheng Qingting from Beijing reported that "the world economy is expected to grow by 3% and 2.9% respectively this year and next, and China remains the largest engine of global economic growth, contributing one-third of global growth." Steven Barnett, Chief Representative of the International Monetary Fund (IMF) in China, stated at the recent press conference of the International Monetary Fund (IMF) World Economic Outlook Report for 2023.
According to the latest IMF forecast, world economic growth will slow down from 3.5% in 2022 to 3% this year and 2.9% next year, which is 0.1 percentage points lower than the forecast in July. The overall inflation rate will decrease from 9.2% in 2022 to 5.9% this year, and further decrease to 4.8% by 2024. The core inflation rate (excluding food and energy prices) is also expected to decline, although the pace of decline is relatively slow, reaching 4.5% next year.
Barnett pointed out that in 2023, the world economy is full of resilience, but there is a widespread scar effect in the post pandemic economy. The scar effect is more pronounced in low-income developing countries after the epidemic, especially in the least developed countries, which have been affected the most, leaving permanent scars. The United States is the country with the fastest recovery among major economies, while China ranks on the average of the global scar effect. In the medium term, the global economic growth rate is the lowest in decades.
After the press conference, Barnett received an exclusive interview with reporters from 21st Century Economic Report. When it comes to China's economic prospects, he said that consumption will play a crucial role in the future. Driven by the reopening of the economy, consumption was the biggest driving force for growth in the first half of the year. On the other hand, exports are returning to normal from their strong performance during the pandemic. This normalization is in line with the global demand shift from tradable goods to services
In terms of future growth, the most important engine so far will be the acceleration of structural reforms. Specifically, further opening up the domestic market and ensuring market neutrality between private and state-owned enterprises can drive medium-term productivity growth in a population headwind, "Barnett said.
China will not experience deflation
21st Century: Can you introduce the IMF's outlook on China's economic prospects for the next two years?
Barnett: China's GDP growth rate was reduced by 0.2 and 0.3 percentage points in 2023 and 2024, respectively. The Chinese economy rebounded strongly after reopening in the first quarter, and the growth momentum has slowed down. Therefore, we expect China's real GDP to grow by 5.0% in 2023 and 4.2% in 2024. The two years of downward adjustments were driven by weaker than expected results in the real estate industry, with the stronger than expected results in the first half of 2023 and the impact of additional policy support partially offsetting the downward trend in 2023.
We believe that China's recent growth prospects still face downward risks, especially in 2024. A larger and longer term adjustment in the real estate industry may further suppress domestic demand, especially when local government finances are facing further pressure. Weaker than expected external demand also brings additional downside risks. On the positive side, stronger than expected policy support, including in the real estate industry, may boost domestic demand.
21st Century: What do you think of China's investment, consumption, import and export?
Barnett: We believe that consumption will play a crucial role in the future. Driven by the reopening of the economy, consumption was the biggest driving force for growth in the first half of the year. On the other hand, exports are returning to normal from their strong performance during the pandemic. This normalization is in line with the rotation of global demand from tradable goods to the service industry.
This also points out an important policy recommendation for China. Specifically, it means rebalancing demand and consumption. The success of this rebalancing will continue to drive consumption (a good indicator of living standards) growth rate to exceed GDP growth rate. Importantly, rebalancing towards consumption rather than investment will also make a significant contribution to achieving China's climate goals.
21st Century: What policy recommendations do you have for China? What is the engine for the future of China's economy?
Barnett: Regarding our recent policy recommendations, I mainly focus on three aspects:
For fiscal policy, we believe that there is room to support consumption in the short term. By shifting policies from investment to measures to support households, this goal can be achieved without increasing the deficit. In the medium term, increasing taxes and reducing off budget investment expenditures can both stabilize debt and support consumption (for example, by strengthening the social security system).
In terms of monetary policy, there is still room for further interest rate easing. In the context of low inflation and sustained economic weakness, such monetary easing policies will support economic recovery and bring inflation closer to the target.
For the real estate market, the top priority is to restore confidence and curb the macro financial risks brought about by the real estate downturn, including accelerating the market-oriented restructuring of struggling developers.
In terms of future growth, the most important engine so far will be the acceleration of structural reforms. Specifically, further opening up the domestic market and ensuring market neutrality between private and state-owned enterprises can drive medium-term productivity growth in a population headwind.
21st Century: Some recent discussions about China, including whether it is trapped in deflation and whether it will repeat the "Japanese style balance sheet recession"? What do you think?
Barnett: Regarding inflation, we do not expect China to experience sustained deflation. In fact, we expect the Consumer Price Index (CPI) inflation rate to reach 0.9% by the end of this year and rise to 2.2% in the medium term. Although the overall consumer price index has been around zero in the past few months, this reflects a decline in food prices. Core inflation (excluding food and energy prices) is a more relevant measure of monetary policy. Core inflation remains positive (with a year-on-year increase of 0.8% in September), and with the sustained economic recovery and improved capacity utilization, it is expected to further increase in the rest of this year and next year.
Regarding the discussion of balance sheet recession, we believe that balance sheet difficulties and debt backlog are still concentrated in the real estate industry, especially for struggling developers. By adopting appropriate policies, local balance sheet difficulties can be prevented from spreading.
The federal funds rate has reached its peak, and the Federal Reserve is not expected to raise rates
21st Century: The IMF has raised the US economic growth forecast for 2023 by 0.3 percentage points to 2.1%, and next year's economic growth forecast by 0.5 percentage points to 1.5%. This makes the United States the only major economy to exceed pre pandemic predictions. Can you elaborate on the reasons behind it?
Barnett: That's right, the United States is the country with the strongest recovery among major economies and the only country expected to surpass pre pandemic predictions by 2023. Private consumption in the United States has always been strong. Firstly, households received a large amount of fiscal transfer payments during the early stages of the pandemic, accumulating savings, and then boosted consumption in the post pandemic recovery; Secondly, as the United States is an exporter of energy and agricultural products, it can relatively well avoid the impact of energy price increases caused by the Ukrainian war; Thirdly, at a time of historical tension in the US labor market, I feel relatively confident (currently the labor market is supporting the growth of real disposable income).
21st Century: Given the "significant strength" of the US economy, what actions do you expect the Federal Reserve to take? How long will high interest rates remain? Can you talk more about the current downward trajectory of inflation in the United States?
Barnett: For policy interest rates, our prediction assumes that the federal funds rate has peaked, but needs to remain at its current level until 2024. For overall inflation, we predict that it has also peaked and will decrease to 3.0% (year-on-year) by the end of this year, and to 2.6% by the end of 2024. However, we expect core inflation to become even more stubborn on the path to the 2% target set by the Federal Reserve, which is expected to be achieved by the end of 2025.
Overall, our assessment is that the Federal Reserve has adopted an appropriate restrictive monetary policy stance, which is necessary to bring inflation back to 2% and restore price stability.
21st Century: What impact does the conflict between Palestine and Israel have on the growth prospects of the global economy? Does it have a direct impact on China?
Barnett: The developments in the region are still extremely unstable. In this situation, we first need to recognize the tragic cost that humanity has paid. We deeply mourn the loss of many civilians and hope that the conflict will stop as soon as possible. From an economic perspective, given the uncertainty of the duration and scale of hostilities, as well as the potential for broader regional impacts, it is still too early to make a meaningful assessment of the economic impact on China or the world economy.
21st Century: The Third the Belt and Road Forum for International Cooperation was held in Beijing. Can you talk about the cooperation between China and the International Monetary Fund in jointly building the "the Belt and Road"?
Barnett: I would like to emphasize a very important area of cooperation: the China International Monetary Fund Joint Capacity Building Center (CICDC). CICDC is a cooperative institution between the International Monetary Fund and the People's Bank of China. CICDC's goal is to help China and the "the Belt and Road" countries jointly build strong economic institutions in the core professional fields of the International Monetary Fund and promote talent development.