China economy will post strong growth in 2021. Assuming the continued suppression of COVID-19, growth is projected to reach 8.5 percent this year. For next year we expect growth to slow to 5.4 percent, as low base effects dissipate, and the economy returns to its pre-COVID trend growth. China's economy grew 7.9 percent from April to June, the National Bureau of Statistics (NBS) announced on July 15.
As the recovery becomes more entrenched, the structure of aggregate demand is expected to continue to rotate toward private domestic demand. Real consumption growth is projected to gradually return to its pre-COVID-19 trend, supported by the ongoing labor market recovery, rising household incomes and improved consumer confidence. Investment will also remain an engine of growth, but its structure is expected to shift toward private investment as manufacturing capex picks up, offsetting cooling infrastructure and property investment. As the global recovery is gaining momentum, export demand is expected to keep industrial capacity utilization high in the short term. However, the contribution of net exports to growth will moderate in the medium term as import growth picks up and international travel slowly resumes in 2022.
Despite the recent surge in imported raw material prices and a pick-up in domestic demand, consumer price inflation is expected to remain below target. This reflects the limited pass-through of rising producer prices to consumer prices as well as the effect of pork price deflation after last year’s swine fever.
Given persistent uncertainty, the authorities will need to stay agile and proactively adjust the level and composition of macroeconomic policy support. As China’s recovery firms up, macroeconomic policies are expected to shift from accommodative to more neutral settings. The pace of policy normalization, however, should continue to be data-dependent and calibrated to the strength of the recovery in China and the rest of the world.