Is the IMF's new China forecast reasonable?

By Kaidi Zhang

On October 10th, the International Monetary Fund increased China's expected growth for 2017 from 6.7% to 6.8%, which is the fourth time this year the IMF has raised its GDP expectations for China. In its latest World Economic Outlook, the IMF has pointed out that global economic growth is strengthening, with growth expected to hit 3.6% in 2017 and 3.7% in 2018.  This is indeed a good news for China, because not only has IMF has forecast stronger economic growth, but it is also expressing optimism about China's economy this year. However, there are still areas of this that need to be addressed: Is the IMF's forecast accurate?  And why has the organization decided to upgrade China's expected growth?  These concerns are important, since the IMF's forecast will influence policymakers. If we cannot understand these two questions, policy makers, entrepreneurs and investors could make incorrect decisions which could worsen China's growth prospects.

Maurice Obstfeld (2nd R), chief economist at the International Monetary Fund (IMF), attends a press briefing at the IMF headquarters in Washington D.C., the United States, on Oct. 10, 2017. The IMF on Tuesday raised its global growth forecast for 2017 and 2018 due to a broad-based recovery in Europe, China, Japan and the United States. [Photo: Xinhua]

I.IMF forecast accuracy 

To judge the accuracy of the IMF's forecast, we need to know the methodology of how it makes its predictions.  Unfortunately, in IMF's World Economic Outlook, we are not able to find a precise mathematic equation the group uses to calculate GDP expectations.  In its news releases, the IMF says its forecasts are based on current data, assumptions about policy effectiveness and global economic trends.  However, we can get a sense of its methodology by referring to its past forecast accuracy. In Figure 1, there is a comparison between the IMF's forecasts and China's real GDP growth from 1999 to 2007.  From this we can come to two obvious conclusions:  Firstly, the forecast in September is going to more accurate than that of April. This is understandable, since September's forecast has more detailed data to analyze than April's does.  As such, we should have more confidence in the new October forecast. Secondly, the IMF understands the general trends of China's growth.  From 1999-2007, China's growth increased from 7.6% to 11.9%, which the IMF also predicted along that general line.  Thirdly, all forecasts from 1999-2007 are lower than China's Real GDP growth.  If the IMF has not altered its conservative prediction algorithms, we should have reason to believe that the latest IMF forecast will come in lower than China's Real GDP growth. 

A chart shows comparison between IMF's Forecast and Real GDP Growth of China. [Chart provided by Kaidi Zhang]

II.Reasons to increase China's growth expectations

Optimism is a good thing, but blind confidence is not. Thus, we need to understand IMF's motivation for increasing China's expected rate of growth along several lines:

Firstly, rapid growth supported by the data is obvious. China's National Bureau of Statistics has released an economic report for the first half of the year showing strong growth.  The GDP increase for first and second quarters both came in at 6.9%.  Employment growth, the PMI and other indexes all back the rapid growth. Thus, adding these factors in the IMF's prediction equation will result in higher growth. 

Secondly, structural improvements and upgrades have been effective.  Structural improvements and upgrading has been the major economic strategy of the Chinese government over the past five years.  The outcome is encouraging.  In the first half of this year, growth in the tertiary industries has increased 7.7%, which is higher than the 6.4% growth of secondary industries and 3.5% growth of primary industries.  Household consumption has also risen significantly, with a greater proportion of spending going toward the services sector.  Total retail sales of consumer goods have increased by 10.4% from January to August. 

Thirdly, external demand remains strong.  The IMF has raised its expectation for global economic growth.  As a major exporter, China will benefit a lot from a strengthening world economy.  China's Customs Bureau has reported a 19.6% increase in exports through the first half of the year.  With strong external demand, China's economy will undoubtedly remain strong. 

Fourthly, growth in the advanced technology sector remains strong.  In the first half of the year, industries connected to the internet, software and technology have grown by 21%.  Alibaba, Tecent and other major tech players have launched numerous research projects in areas such as artificial intelligence, 3D printing and virtual reality, among others.  Manufacturing of high-end and value-added products has increased by around 7% so far this year. 

So what will China's 2017 GDP growth eventually be? The IMF's prediction of 6.8% may not be high enough. Zhou Xiaochuan, Governor of the People's Bank of China, is predicting GDP growth through the second half of 2017 will come in at 7%.  Though there are some risks for China's economy, including market stability, debt and asset bubbles, I have strong confidence in higher economy growth in China this year because of the country's rational economic structure, technological innovation and the revival of the external trading environment. But will it be higher or lower than 6.8%?  We'll have to wait and see. 

(Kaidi Zhang is a PhD candidate, School of Economics and Management, Tsinghua University)