China's Slowest Growth in 24 Years

China’s economy grew by 7.4% in 2014, the lowest rate of economy growth in China in 24 years.  Moreover, China narrowly failed to meet its government’s growth forecast of 7.5% for 2014.  Nevertheless, this was a better performance for the world’s second-largest economy than many had feared as a number of internal and external factors weighed heavily on the Chinese economy over the course of 2014.  Looking ahead, China’s gradual slowdown is forecast to continue and many signs in recent weeks suggest that growth in 2015 will be slightly below that of the previous year.

In the fourth quarter of 2014, China’s GDP growth rate was 7.3% on a year-on-year basis, a slightly better performance than had been expected.  This solid performance over the last three months of 2014 was due to a number of factors, including more government support for the economy, rising export demand in North America and continued consumer demand growth in China.  Nevertheless, this level of growth is a far cry from the double-digit economic growth rates that China had been achieving just a few years ago and this could force the Chinese government to take greater steps to stimulate the economy in the coming months, something that is currently being debated in Beijing.

Three key factors have resulted in economic growth rates continuing to trend downwards in China over the past few years.  First, investment levels have tapered off over the past year, despite government efforts to promote investment.  Second, China’s property market continues to weaken, even as the government has pumped vast sums of money into schemes aimed at reviving the property sector.  Third, export demand in key markets in Asia and Europe remained very weak in recent years, while China’s export competitiveness is gradually being eroded as manufacturing costs rise in China and as the currencies of rival exporters have depreciated sharply against the yuan.  Together, these factors have led to the lower rates of economic growth that China has recorded in recent years and each of these factors will remain in place over the course of 2015. 

Looking ahead, we forecast that economic growth rates will continue to slowly trend downwards, falling to below 7% by 2016.  Growth will not fall too far thanks to the continuing increase in consumer spending in China, which will become an ever-greater engine for growth in China.  Likewise, China will remain the world’s pre-eminent manufacturing power, even as its export competitiveness advantages over many of its rivals are slowly eroded.  On the negative side, China will face some significant risks in the years ahead, most notably its precipitous demographic decline that will shrink China’s workforce while expanding its retirement-age population.  Furthermore, deflationary pressures could emerge as energy prices fall, although the risk of long-term deflation will only emerge at a later date.  Finally, debt levels, particularly at the local and provincial level, continue to rise to dangerous heights and could destabilize the economy at some point in the future.