Home > China, Journalism and Economics > Some Perspective on “Slashed” GDP Forecast

Some Perspective on “Slashed” GDP Forecast

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A business school professor once warned us students to be careful about getting information from even respected news sources like the Wall Street Journal. He reminded us that the reporters often were more journalists than business experts, and did not always have deep knowledge of the topics they covered.

I don’t think it’s a misleading article, but there’s a lot of context missing here:

Goldman Sachs on Wednesday slashed it [sic] outlook for China’s economic growth next year, down to 7.1% from a previous 7.6% projection.

The Goldman Sachs team cited “recently completed research on potential growth and the output gap across Asia,” adding that they saw “a likely reduction in the government’s growth target next year reducing the pressure for aggressive policy easing.”

The change in forecast is only half a percent. That would be much more significant coming off of a forecast for 2% or 3% growth. But slashed?

To add some perspective:

  • GDP growth of 7.1% will add about $640 billion to the size of China’s economy. That’s close to the entire GDP of Switzerland, the world’s 20th largest economy.
  • China’s population is just barely growing, by about 0.5% per year, or between 6-7 million. That means most of this economic growth will translate into real standard of living improvements for Chinese people. Per capita incomes are likely to rise by about $500.

No economy has been able to sustain this kind of growth for very long. As an economy matures, its growth naturally slows. The most important part of this story isn’t that there’s been a one-half percent downward adjustment to expected growth. It’s that this economy can still grow by over 7% in any year, now almost 40 years after it all began.

One more small rant. I dislike this kind of laziness in financial journalism:

Despite the Goldman cut, Chinese markets managed to gain…

Anyone who knows the basics of markets should know that markets react to news in relationship to the news they expected (or, sometimes, to any more certain news where there was uncertainty before). So, there’s no good reason to say “despite the Goldman cut,” because for all we know, the markets expected a larger drop in the forecast, and the 0.5% drop was much smaller than expected. In that case, its “Because the Goldman cut was smaller than expected, Chinese markets gained…”

From the article we don’t know if the gain really was “despite” the change in forecast. But it’s unlikely the market is dumb. When it saw Goldman’s revised estimate, it’s improbable that investors stupidly went out and drove up prices, contrary to all reason.

Clearly there’s more to the story than this, but we’re left scratching our heads. A more interesting piece of reporting would tell us why the markets managed to gain at this news.

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