Friday, January 20, 2012

Forecasting China's GDP growth - and getting it wrong every time

The chart from Credit Suisse shows just how consistently economists have been underestimating China's GDP growth in their forecasts.  A significant slowdown has been in the forecast almost every year.

Source: CS - click on the chart to zoom
This is not surprising given that China's double digit growth is simply not sustainable.
Yuhan Zhang: Over-reliance on investment and exports makes China’s economy very unbalanced, vulnerable, and unsustainable. Prolonged investment on a massive scale creates significant overcapacity in a range of sectors such as steel and solar heating, which diminishes productivity improvements. Additionally, huge investment including the 4 trillion renminbi stimulus plan leads to increasing debt. Much of the medium- and long-term bank lending for infrastructure flows to local quasi-government agencies. At the end of 2009, local debt incurred by China’s investment reached to 6 trillion renminbi and now stands at 10.7 trillion or even more...
However each year economists tend to miss the impact of central planning that isn't present in other economies.  Assuming it has inflation under control, the government can quickly turn on tremendous amounts of stimulus not available to other nations.  Clearly as Zhang points out (above) this type of growth is unhealthy and even dangerous.  But in order for the Communist Party to stay in power, it has to deliver strong growth and will stop at nothing to accomplish that goal.



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