Wall Street Highlights – Macro

The Chinese economy faced significant growth headwinds in 2024, and policymakers finally started more forceful easing in late September. However, the November US election outcome suggests additional growth headwinds from US tariffs next year. How Chinese policymakers will lean against the wind to stabilize domestic consumption and the property market, and to manage renewed US-China trade tensions will be the overarching theme of 2025.

GS’s baseline scenario for 2025 assumes the US effective tariff rate on Chinese goods increasing by 20pp and Chinese real exports remaining flat after double-digit growth in 2024, as declines in US-bound exports are offset by increases in exports to other countries. Under these assumptions, China’s real GDP growth decelerates from 4.9% this year to 4.5% next year. Two choices are in front of Chinese policymakers, either to provide a large dose of policy offset or to accept a notably lower headline real GDP growth, and GS expect them to choose the former. On stimulus, GS expect Chinese policymakers to cut policy rates considerably by 40bp and expand the augmented fiscal deficit meaningfully by 1.8pp of GDP in 2025.

This current stimulus approach differs from historical easing cycles. GS expect exports to be relatively stable, declines in property investment to continue, and consumption (especially goods consumption) to outperform. Growth of government consumption and investment is likely to accelerate as local government debt resolution eases local financing stresses and enables fiscal expansion.

However, GS’s inflation projections are notably below consensus. GS expect Consumer Price Index (CPI) and Producer Price Index (PPI) inflation to be 0.8% and 0%, respectively, in 2025. Sluggish inflation is attributed to structural factors like the multi-year housing downturn and persistent industrial overcapacity, as well as the time required to restore consumer confidence and strengthen labor markets.

With incremental housing easing measures ahead, it is possible to see a stabilization of home prices in some large cities next year, while for many construction-related property activities, their multi-year downtrend appears inevitable, in GS’s view. GS expect infrastructure investment growth to rise to 7.5% in 2025 on more fiscal stimulus. Property investment growth may remain unchanged at -10% year-over-year. GS assume Chinese exports to the US will decline significantly in 2025, similar to the 2018-19 episode. While exports to other countries will increase modestly thanks partly to strong price competitiveness and potential RMB depreciation.

The range of potential outcomes for 2025 is wide due to domestic policy uncertainties and heightened tariff risks. Scenarios that could deviate from the baseline include higher-than-expected US tariffs on China by much more than 20% (downside risk), more resilient Chinese exports than expected (upside risk), or a strong focus on foreign exchange stability by Chinese policymakers (downside risk to GS’s USDCNY forecast).

Over the medium term, China's leadership remains committed to transitioning towards a technology-driven and self-reliant growth model. The cost of climbing up the “high-quality” ladder, in GS’s view, is a slower speed of economic growth. GS expect real GDP growth to average 3.5% from 2025 to 2035, compared to 9.0% during 2000-2019.