Tight consensus on China’s growth rate not reflecting real range of opinion

July 16, 2014

AChina’s economy, even to a non-specialist given a few minutes to stop and think, is clearly extremely difficult to measure.

When your population is 1.4 billion and you are in the midst of an unprecedented government and credit-fuelled expansion in infrastructure on your way to developed economy status, there are plenty of things that may get overlooked.

This is a completely normal set of circumstances in any developing and rapidly-changing economy no matter what methodology is used. Enough to fill tomes has been written on China’s data measurement challenges by commentators, policymakers and academics, not to mention the whole question of whether GDP is a useful way of measuring how any economy is faring.

What is truly striking is the lack of variance of opinion on where growth is headed in a country that has just gone through one of the biggest credit binges in history, with the credit to GDP ratio up by nearly two-thirds over the past five years, since the global financial crisis set in.

The latest GDP growth figure, for Q2, came in at 7.5 percent, just 0.1 percentage point above the consensus. That is the growth rate the Chinese government is aiming for this year. The range of opinion was very narrow, from 7.2 percent to 7.6 percent.

Given the deep-rooted concerns among many well-respected international observers that China’s mild property market correction has a lot further to run and threatens to take down the economy with it, that unanimity among forecasters is remarkable.

Consider the U.S. economy, the only one in the world larger than China’s, and one that will be overtaken by it likely within a generation if this kind of growth is sustained.

At the start of the year, the consensus forecast was for 2.5 percent U.S. growth in the first quarter, annualized. Of course that was more than three months before the first read on that quarter was available. When it came, that first release showed virtually no growth, and the final data revealed an ugly 2.9 percent contraction.

Economists are still stumped over what exactly happened in Q1. The only thing anyone noticed before the numbers were finalised that was clearly different from previous starts to the year was that it was one of the worst and coldest winters in memory. But it was even colder in Canada and there was no similar effect. There was nothing in the way of changes to U.S. monetary or fiscal policy to give forecasters a sense that anything was about to turn violently. And yet still the data came as a shock.

Over the past two years, the range of opinion on forecasts for China GDP in the week up to each release has never been wider than 1.2 percentage points. The furthest away from consensus the actual reported GDP figure was 0.2 percentage points lower, at 8.1 percent versus an expected 8.3 percent in the first quarter of 2012. Four were exactly on consensus, and the remaining ones were, like this latest figure, just 0.1 percentage point off.

Over the same two-year period, the difference between the highest and lowest forecast on the first release of U.S. GDP was at most 2.2 percentage points in the survey taken just ahead of publication date, and 1.6 percentage points on average. The consensus was exactly correct on one occasion, with the largest difference between actual and consensus at any one time 1.1 percentage points. That was for Q1 2014, first reported at 0.1 percent—since revised down to -2.9 percent at final release.

U.S. data are seasonally adjusted annualized rates for the quarter, while the China data are measured for the quarter compared with a year ago. So the two series are not exactly the same, but they are reported at roughly the same time, they represent the world’s largest and second largest economies, and they are the ones everyone watches.

Let statisticians quibble over the details. But in the meantime, take note of the differences.

— with reporting by Shaloo Shrivastava

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