Battered by the last four years of pandemic, record inflation, long-drawn-out wars and high interest rates, the global economic outlook continues to be lacklustre. In its latest World Economic Outlook update, the International Monetary Fund (IMF) forecasts that the global economy will grow 3.2 per cent this year, down a tick from 3.3pc growth last year.

From 2000 through 2019, before the pandemic upended economic activity, global growth had averaged 3.8pc a year. Even this modest global expansion, the IMF notes, is being powered by stronger growth in China. The Fund expects the Chinese economy to grow by 5pc this year, an upgrade from the 4.6pc it had predicted in January but slower than the 5.2pc expansion the previous year.

China alone accounts for nearly a third of global growth. According to IMF analysis, a one percentage point increase in China’s GDP growth would result in an average of 0.3 percentage point increase in growth for other economies. In China, the IMF said, the resurgent domestic consumption propelled the positive upside aided by what looked to be a surge in exports belatedly reconnecting with last year’s rise in global demand.

Using IMF forecasts, a Bloomberg report in May this year said China would be the top contributor to global growth over the next five years, with its share bigger than all G-7 countries combined. China will account for about 21pc of the world’s new economic activity from this year through 2029. That compares with 20pc for the G-7 and almost double the nearly 12pc for the US.

Beijing is responsible for more than a third of the world’s growth — any deceleration will be felt beyond its borders

The IMF’s chief economist, Pierre-Olivier Gourinchas, writes that China and India will account for nearly half of global growth this year. The IMF upgraded its economic outlook for China, India, and Europe and lowered expectations for the US and Japan.

The IMF update also says that worldwide progress against accelerating prices is “slowed by stickier-than-expected inflation for services.” Services price inflation, according to it, is “holding up progress on disinflation, which is complicating monetary policy normalisation.”

Upside risks to inflation have thus increased, raising the prospect of higher-for-longer interest rates. The IMF estimates that there will be more scarring for low-income developing countries, many of which are still struggling to turn the page from the pandemic and cost-of-living crises.

Previously, the IMF had also expressed trepidation about the US using industrial policy to subsidise America’s clean energy and semiconductor sectors, with Gourinchas saying such actions had been leading to a “tit for tat” in trade restrictions and weighing on global output. He believes that some of the measures put in place by Washington, such as rules requiring companies to use only American-made components to qualify for certain manufacturing tax credits, were not compliant with international trade rules.

Experts note that, in particular, tensions between the United States and China pose a significant threat to economic development worldwide — especially for developing economies. Last year, the IMF estimated that economic fragmentation and increased international trade restrictions could cost the global economy $7.4 trillion and cut global economic output by as much as 7pc.

The IMF’s forecast for growth in emerging markets and developing economies has been revised upward. The projected increase is powered by stronger activity in Asia, particularly China and India. India’s economy is now forecast to expand 7pc, up from the 6.8pc the IMF had projected in April, in part because of stronger consumer spending in rural areas.

China’s economy has maintained stable expansion in the first half of this year despite rising challenges from home and abroad. Official data shows it grew by 5pc to about $8.65tr. The growth was “hard-won” as the world’s second-largest economy had faced a more uncertain, complex and severe external environment, as well as new challenges from deepening structural adjustment domestically, its National Bureau of Statistics (NBS) noted.

Support from policy incentives, a rebound in external demand and the development of new quality productive forces. A key part of China’s growth momentum against headwinds has come from its new growth drivers and faster upgrading of traditional industries. Investment into high-tech manufacturing and services expanded 10.1pc and 11.7pc, respectively, in the first half, well above the 3.9pc headline growth of fixed-asset investment.

Even though short-term factors such as extreme weather and floods, as well as rising difficulties and challenges, especially from insufficient effective demand and unsmooth economic flow at home, kept growth down to 4.7pc in the second quarter to June, China’s urban unemployment rate is down by 0.2 percentage points and its per capita disposable income is up by 5.4pc year on year.

Industrial production has turned smarter and greener, according to the new data. The high-tech manufacturing sector saw output up 8.7pc while the production of service robots and new energy vehicles surged at 22.8pc and 34.3pc, respectively.

“From a comprehensive perspective, the favourable conditions facing China’s development are stronger than the unfavourable ones,” the NBS said. “The economic fundamentals that will sustain long-term growth remain unchanged, and the trend toward high-quality development has not changed,” the bureau said, noting that the Chinese economy is still a key engine for global growth.

With the global economy facing uncertainties and challenges, China’s role as a stabilising force is more crucial than ever, as pointed out in a recent article by Zamir Ahmed Awan, founding chair of the Pakistani think tank Global Silk Route Research Alliance.

The IMF believes that Asia’s emerging market economies, represented by countries including China, remain the main engine of the global economy. The stable operation and long-term positive outlook of the Chinese economy have also boosted confidence in global economic recovery, as underlined by the July IMF update.

The country continues to be an important engine and stabilising force for the world economy. When you consider that China is responsible for more than a third of the growth seen in the world, any kind of deceleration will be felt beyond its borders.

Published in Dawn, The Business and Finance Weekly, July 29th, 2024