December 19, 2011

China's economic forecast depends upon how well the government can counter the slowing

1. Wall Street Journal - Why Predicting China’s Economic Growth is So Hard

Economic forecasts are underpinned by estimates of the potential growth rate of the economy, and it is here that the uncertainties start. Potential growth is determined by limits on the availability of labor, capital, and how effectively the two can be put together.

In the U.S. and major European economies, all those variables are known, or estimable with some degree of accuracy. In China, they are not. The number of rural workers waiting to make the trek from farm to factory, the size of the capital stock and the extent of productivity growth are all subject to considerable uncertainty.

What everyone agrees on is that China’s potential growth rate is slowing. But with so much disagreement on the basics of labor force and capital stock, predicting how far and how fast it will slow is no easy task. In practice, many economists simply look at the current growth rate and assume a gradual slowdown over the next decade.

Adding to the confusion, if business investment falls sharply – as it did in 2009 – there’s every chance the government will step up to the plate. That decision can have a huge impact. In 2009, it was massive public infrastructure investment that saved the day. But there’s no way that looking at historical trends would allow economists to forecast it.

2. Krugman - How much damage will it [real estate price drops and credit issues] do to the Chinese economy — and the world?

Some commentators say not to worry, that China has strong, smart leaders who will do whatever is necessary to cope with a downturn. Implied though not often stated is the thought that China can do what it takes because it doesn’t have to worry about democratic niceties.

To me, however, these sound like famous last words. After all, I remember very well getting similar assurances about Japan in the 1980s, where the brilliant bureaucrats at the Ministry of Finance supposedly had everything under control. And later, there were assurances that America would never, ever, repeat the mistakes that led to Japan’s lost decade — when we are, in reality, doing even worse than Japan did.

3. Forbes has a forecast for china ins 2012-2013 from Bill Conerly.

China has a very favorable base case forecast, but it’s at substantial risk from a European downturn. Given that we cannot be sure that Europe will muddle through, the possibility of bad news cannot be ignored, even though my best estimate is for continued economic expansion in China.

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