Opinion / Op-Ed Contributors

What will the economy be like next year

By Mark Williams and Julian Evans-Pritchard (China Daily) Updated: 2014-12-08 07:54

China's leaders will gather in Beijing shortly to discuss priorities for 2015. They use the year-end Economic Work Conference to set out priorities for the year ahead.

Fiscal policy has been "proactive" in 11 of the last 15 years, including in the past few years in which the (cyclically adjusted) fiscal deficit was first reduced and then rebounded. And monetary policy has been "prudent" since 2011 and will probably remain that way in 2015.

The People's Bank of China recently cut benchmark interest rates and we (at Capital Economics) expect further cuts next year. But changes in policy and in how policy is described don't go hand in hand. For example, the shift from "prudent" to "tight" policy at the end of 2007 only happened when the tightening cycle had almost come to an end.

Despite the economic slowdown this year, the labor market has proved remarkably resilient. And as China's economy shifts towards the more labor-intensive service sector, lower growth rates will be sufficient to maintain healthy employment growth. With the labor market now their primary concern, policymakers should therefore feel comfortable lowering their growth target for next year, most likely to "about 7.0 percent".

Turning to the outlook for the main expenditure components, consumption growth has been broadly stable this year and should hold up reasonably well in 2015 given the recent strength of wage growth. Also, export growth, which has picked up this year, should remain healthy given that we expect global growth to be slightly stronger in 2015.

However, support from consumption and exports is unlikely to fully offset downward pressure on growth because of overcapacity in many industries, most notably property, which will weigh on investment.

While recent policy measures are likely to provide some support to sales, a large glut of unsold properties means developers will remain cautious about launching new projects and we therefore don't foresee a marked recover in construction activity next year.

More positively, the recent sharp fall in oil prices should give a boost to spending. In 2013, China's net imports of oil cost the equivalent of 2.5 percent of GDP. If the 30 percent fall in global oil prices is sustained, the economy as a whole will be better off to the tune of 0.8 percent of GDP.

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