An elderly woman pushes a cart filled with cardboard for recycling in the North Point area of Hong Kong, China. (Photographer: Brent Lewin/Bloomberg)

Davos 2019: Kenneth Rogoff Says China’s Economic Slowdown Isn’t Temporary

China is staring at a long-term slow growth rate, which can't be fixed even with a big stimulus as in the past, according to Kenneth Rogoff.

“China’s slowdown is much more fundamental on running out of steam on productivity,” Rogoff, professor of Economics & Public Policy at Harvard University, told BloombergQuint on the sidelines of World Economic Forum in Davos, Switzerland. “They’re centralising power, decision-making and weakening the private sector; everyone is afraid of being put in jail. They are also putting money into zombie state-firms. This is not a recipe for 10-percent growth.”

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Rogoff also said there were imbalances in the Chinese economy like infrastructure spending and housing which needed to be addressed with permanent solutions than credit-driven stimulus. “They could do reforms as promised by President Xi Jinping,” he said. “That could give them a longer period but I don't think it would permanently change the downward trend.”

Chinese are getting near the end of how much they can do with credit-driven stimulus policies to stem the slowdown. So their tools are limited.
Professor Kenneth Rogoff, Harvard University

Watch the full interview here:

Here’s the edited transcript:

Which are the weak points in global scenario that worry you?

Without any question, China’s economic slowdown. It was inevitable for a long time. I
don’t think it’s just a temporary slowdown and they have big stimulus and it’s all over. It is much more fundamental on running out of steam on productivity. Their fundamental problem is that they need to decentralise
the economy to make it more innovative and consumer driven. They’re centralising power and decision making and weakening the private sector, everyone is afraid of being put in jail. They are putting money into zombie state-firms.  This is not a recipe for 10 percent growth and so you’re looking at long-term, low growth rate in China.

Will transition to lower growth rates be a smoother move or volatile?

You never know that. But I think it will be impactful over the next few years. Obviously, there is a question about how a Chinese-style financial problem will play out.  More things have to be bailed out. There are imbalances in the Chinese economy that are not easily addressed like construction is a very big part (of the economy). They have a lot of housing where per capita square meters built is as much as Germany despite
being a developing economy. They’re coming to the end of the road. They could do reforms which President Xi Jinping promised to do. That could give them a longer period but don’t think it would permanently change the downward trend.

How is going to end? Will it be catastrophic?

It has been impactful. Look at how commodity, oil prices and growth in emerging markets in general has been hit by China. They’ve done an amazing job at smoothing things out. But again, lot of that in, credit driven stimulus polices and lot of it in housing, construction. And they’re getting near the end of how much they can do that. So, their tools are limited.  

What does it mean to the rest of us in 2019?

Countries that are dependent on exports to China particularly Germany, EM- it’s going to be painful. They will have adjustments to make. It is not the same as financial crisis. The U.S. is doing okay.  We’re trying very hard to shoot ourselves in the foot and take a growth story and ruin it. The best guess is U.S. Federal Reserve will be patient, the shutdown will end and growth will be good.

Besides the weakness in China, you are not concerned about many other spots in world. The IMF flagged off slowing growth and Italy and part of Europe. Does that describe the outlook for the year?

China is now by some measures of biggest economy in world. Even if it doesn’t go down to zero growth, recession in China, we have not seen it before. There are Italians I spoke who say there is catastrophe. Our government are idiots and it is end of the world. When interest rates are this low, it is hard crises because it is too easy to borrow. Perhaps slowdown in China, populism in the U.S. has made global interest rates rise, Italy will get hammered, the euro will be in trouble but that is an outside risk.

Do you think two hikes not three moderates the policy moment?

I believe two or three hikes but that because I think the U.S. will do well. The trouble with what Fed’s message was that they didn’t made it data dependent. They didn’t emphasise that point. Their forecast is way more optimistic than private sector. They said they are right, and they will raise interest rates. You look at data coming out of China, the uncertainties in market. It wasn’t just Jerome Powell but whole Fed got it wrong in December. Jerome Powell have done lot of correction so far. According to my forecast which is more optimistic than market, I do think we’ll have two-three increases. We get market forecast for growth which is low, saying that we may have none or a cut next year.

You are saying that this year should be slightly better than second half of last year where the expectation was full peddle along the rate hikes.

It is a good bet that it is more benign. We are in first half of year and it is long year. The first half of the year will be more benign for Fed and it will be working more patiently, and it is worried about the events elsewhere. Where is the inflation? We have inflation in 20 years. We will have significant inflation once again. Until, we have it they need to be patient. They are moving their thinking in Fed.

What you make forecast for EMs like India this year?

I am very optimistic about India’s growth as there is so much productivity potential. After the election, whoever is in power will do reforms and re-energise the economy. When I was at IMF and then came to India, I said you can have 7-8 percent growth someday and everyone said that it is crazy and will not happen. There is a lot to ride in India which will continue. You need growth for long time in India and not for few years.

Also read: Davos 2019: IMF Chief Economist Gita Gopinath Flags India’s Fiscal Slippage Risk