Goldman Sachs on economic growth, inflation, coronavirus


People wearing face masks walk down Qianmen Street to shop during the country’s national “Golden Week” in Beijing on October 5, 2020.

Noel Celis | AFP | Getty Images

SINGAPORE – China’s growth is likely to slow in the coming months as the country faces risk on two fronts, according to chief Asian economist Goldman Sachs.

“The first is simply that policymakers are reasonably satisfied with the recovery so far and are starting to withdraw policy incentives to some extent,” Andrew Tilton said on Streets Signs Asia on Monday.

“If things continue to go well, we could face inflation risks,” he added.

China is expected to show “spectacular” gross domestic product numbers in the first quarter of this year.

The world’s second largest economy posted robust GDP growth of 6.5% year over year in the fourth quarter of 2020. It exceeded market expectations and made China one of the few major economies in the world to experience positive growth for a year that was hit by the coronavirus pandemic.

Explaining the move by Chinese politicians to pull back on incentives, Tilton said, “Credit growth has slowed, the budget deficit has hit, and recently liquidity has tightened to curb what they might see as excessive speculation in the markets.”

New Covid outbreaks in China are raising concerns

The second challenge to China’s growth recovery is resurgence of local outbreaks, Tilton said.

The country is currently battling one of the worst outbreaks since March last year. Chinese authorities recently put new restrictions in place to contain a number of outbreaks in and around Beijing.

“The main argument is that China has largely normalized, so there are more downsides if the virus spreads again and there are fewer downsides before you start to hit capacity constraints,” he said.

What has yet to normalize is the services sector of the economy, which we all know has been severely constrained by virus restrictions in many countries.

Andrew Tilton

Goldman Sachs’ Chief Asian Economist

Ultimately, Tilton expects the markets to stay in the relatively “happy middle of these two scenarios” for the next six to nine months. “But I think the markets are likely to worry about one or both of them at times,” he noted.

In terms of regional growth, Tilton remains confident that Asian trade will recover, reflecting the broader global revival in industrial activity.

“This year the commercial goods sector of the economy is relatively less susceptible to virus-related restrictions. So that’s already bounced back pretty much. And we can see that in trade volumes and prices,” he said. “What has yet to normalize is the service sector of the economy, which we all know has been severely constrained by virus restrictions in many countries.”

Overall, Tilton is optimistic about regional growth in Asia for 2021, but believes that “China is likely to reach consensus or maybe a little below”.