Why does the IMF raise its global growth forecast while lowering its growth forecast for China?

Please remember to like, share! If you haven’t subscribed yet, please follow the account ‘Sanlang Macroeconomics New’—thank you! Executive Summary: The IMF has raised its global growth forecast but lowered its growth forecast for China. On the surface, this reflects energy shocks and divergent AI investment trends; at a deeper level, it stems from structural imbalances in China—including weak domestic demand, ongoing real estate sector adjustment, overexpansion of production capacity, and lagging household consumption. Exports and investment can sustain growth—but they cannot permanently substitute for rising household incomes and consumption. The IMF upgraded its global growth forecast, yet downgraded its forecast for China’s economic growth. This apparent contradiction reflects two entirely distinct growth logics. On October 13, the International Monetary Fund (IMF), meeting in Bangkok, released its latest World Economic Outlook, raising its 2026 global growth forecast to 3.1%, while lowering its forecast for China’s growth to 4.5%—and projecting a further slowdown to 4% in 2027. On one side, AI-driven investment is boosting growth in the United States and parts of Asia; on the other, surging energy prices are squeezing demand, and China’s real estate adjustment is dragging down domestic demand. The global economy is not without growth—but the sources of that growth are increasingly divergent. China’s challenge is not merely slowing growth rates; rather, its traditional growth model is becoming increasingly unsustainable. This unsustainability manifests in four key issues. I. Why does strong export performance paradoxically highlight the problem of weak domestic demand? The IMF’s upward revision of the global growth forecast is driven primarily by the AI investment boom. U.S. growth is projected at 2.3%, India’s at 7%, and Taiwan’s—benefiting from semiconductor and AI supply chains—at 10.7%. Yet the Middle East conflict has pushed up energy prices, constraining growth prospects across many emerging economies. China’s situation differs. The IMF notes persistent pressure on the real estate market, sluggish domestic demand, and slowing investment growth—factors that robust exports can only partially offset. The issue is not insufficient productive capacity, but rather a mismatch between that capacity and domestic purchasing power. The IMF estimates China’s current-account surplus will reach 3.3% of GDP in 2025—significantly higher than its earlier projection of 1.5%; its model also suggests the RMB’s real exchange rate is undervalued by approximately 16.4%. It should be noted that these figures stem from IMF modeling assumptions—not universally accepted market consensus—and Chinese representatives have questioned these valuations. Nonetheless, the massive trade surplus signals a noteworthy phenomenon: a substantial portion of domestically produced goods must be absorbed by overseas markets. Exports generate output, employment, and foreign exchange—but they do not automatically resolve insufficient household consumption. If domestic income growth and consumption capacity fail to keep pace with production expansion, firms become increasingly dependent on external demand. This model works well when global markets are open and external demand is strong; however, once trade barriers rise or foreign markets adopt protectionist policies to shield domestic industries, this growth engine faces constraints. II. Why might debt-financed investment and industrial subsidies exacerbate overcapacity? China’s past growth relied heavily on infrastructure construction, real estate development, and manufacturing investment. These investments once effectively addressed supply shortages and laid the foundation for industrialization.

China and India: A Comparative Analysis of Development Experiences

In terms of economic growth, whether differences in the development paths of China and India are the primary cause of their divergent performance is not self-evident. One could imagine that certain uncontrollable factors—such as cultural heritage, ethnic composition, initial economic conditions, or natural or external events—may have made China’s growth faster than India’s. Nevertheless, I believe China’s development path has been more conducive to economic growth in several important respects. First, China’s path involved far more radical social and economic institutional transformations than India’s. In nearly all spheres of society, the Chinese undertook fundamental changes that inevitably profoundly influenced the values, attitudes, and behavioral patterns of the Chinese people. In many cases, such institutional change may have proceeded too rapidly—or been too turbulent—to yield immediate economic benefits, at least in the short term. Cycles of policy shifts and even reversals indicate that such outcomes have occurred repeatedly. Yet the long-term effect most likely generated by China’s radical institutional transformation is the creation of a socio-psychological environment more favorable to economic and technological progress than either pre-revolutionary China or contemporary India. Leveraging powerful governmental and party institutions, along with a revolutionary ideology, China’s leadership succeeded in reaching virtually the entire population and mobilizing and motivating them toward economic achievement. In contrast, institutional reform in India has been relatively limited in scope, meaning Indian government programs and policies have had comparatively little impact on the lives and attitudes of the vast majority of Indians. A second major feature of China’s development path that has contributed to its comparatively strong modern growth performance is the central authorities’ firm control over the economy. The dominant position occupied by Chinese state planners stands in sharp contrast to India’s complex dispersion of authority among government planners, private enterprises, and various other interest groups. Although China’s overall administrative framework has gradually moved toward greater decentralization of economic decision-making, central planners have consistently ensured that a high proportion of national surplus is mobilized and deployed for developmental purposes. Luxurious consumption was virtually prohibited, and most consumption was tightly controlled to remain within necessary and productive forms—that is, forms that enhance labor force health, education, and overall productivity. By contrast, India’s economic policy has been marked by conflict and compromise among competing interests, with no single group exercising decisive authority. On the one hand, powerful private-sector groups have prevented Indian planners from restricting non-essential and non-productive consumption, or from raising and allocating public resources for development purposes in the quantities and directions they desired. On the other hand, periodic political pressure from the middle-income strata has constrained the Indian government’s responsiveness to large business interests and brought its policies into conflict with domestic and international capitalists’ desire for relatively unconstrained, profit-driven expansion. The ultimate result is an economic strategy blending public and private authority—one that undermines both socialist accumulation and capitalist accumulation. A third feature of China’s development path that appears more conducive to rapid economic growth than India’s is its greater egalitarianism. Undoubtedly, an egalitarian strategy requires diverting resources and effort away from other areas to benefit the poor—and may somewhat dampen incentives for individual economic gain. Yet in many respects, greater equality can also be beneficial for growth—and these benefits appear especially dominant in societies as poor and initially as unequal as China and India.

China, India Growth Paths Diverge as Weak Domestic Demand Weighs – Moody’s

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Moody’s forecasts China’s GDP slowing to 4.5% in 2026 due to weak demand, while India grows near 7%. The report highlights rising energy costs impacting manufacturing and food inflation risks in India.

icis

2026-11-12

China, India Growth Paths Diverge as Weak Domestic Demand Weighs – Moody’s

China, India Growth Paths Diverge as Weak Domestic Demand Weighs – Moody’s

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