Our economic outlook for China
January 24, 2025
Our outlook for year-end 2025
4.5%
Economic growth,
year over year
A strong end to the year helped China achieve its 2024 economic growth target. The headwinds could be stronger in 2025, with a spotlight on the degree of policy support offered and potential U.S. tariffs. We continue to expect real GDP growth to slow to around 4.5% in 2025 as the drag from anticipated tariffs will likely outweigh the benefits of policy easing.
1.5%
Core inflation, year over year
We foresee only a modest inflationary thrust from currency depreciation in the face of higher tariffs. Rather, supply-centric policy support has reinforced a negative feedback loop between weak demand and low prices. Both the magnitude and composition (that is, greater support to consumers) of policy stimulus are critical to breaking the cycle.
1.2%
Monetary policy rate
The prolonged property downturn and fragile consumer sentiment underscore the need for robust policy support. We expect fiscal policy to take the lead, with the official fiscal deficit limit likely to be increased alongside an increased government bond issuance quota. On the monetary side, we foresee 30 basis points of cuts to the policy seven-day reverse repo rate in 2025, from the current 1.5% to 1.2%, as well as further reductions to banks’ reserve requirement ratios to facilitate fiscal expansion. Although we expect the People’s Bank of China to allow for some currency depreciation in 2025 in anticipation of higher tariffs, concerns on that front could constrain the magnitude of policy rate cuts.
5.1%
Unemployment rate
We believe that structural mismatches in labor supply and demand, particularly among younger workers, may not be easily addressed in the near term and could require additional policy support. We foresee the unemployment rate remaining around current levels the rest of the year.
What I’m watching
China’s holistic fiscal policy stance
Monetary policy has likely reached the limits of its ability to stimulate the economy given weak domestic demand, with liquidity injections being offset by softening business sentiment. To significantly increase growth momentum, fiscal policy needs to take the lead. The heavy lift will fall to the central government, given local governments’ debt concerns. We expect monetary policy easing to support fiscal expansion. Further fiscal stimulus could take the form of budget revisions, with a debt-ceiling overshoot possible.
Grant Feng,
Vanguard Senior Economist
China's fiscal deficit and its components
Notes: Augmented fiscal deficit is a fiscal deficit measure that includes typically off-budget activities, including local government financing vehicles and land sales.
Source: Vanguard calculations, based on Ministry of Finance data as of August 31, 2024.
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