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China labour market can cope with lower growth

Demographic changes and a growing, labour-intensive service sector should help the Chinese economy cope with gradually lower GDP growth, says SEB economist Andreas Johnson in a new report.

Demographic changes and a growing, labour-intensive service sector will help China cope with lower GDP growth, says SEB economist Andreas Johnson.

China is facing very rapid and far-reaching demographic changes. The working-age population has already begun to shrink and is expected to continue shrinking until 2030. Although labour force participation can be boosted, for example by raising the retirement age, demographic change is occurring too rapidly to be offset completely. This implies that the labour supply will shrink in the years ahead.

One cornerstone of China’s ongoing reform efforts is to shift from a growth model driven by exports and investments to one driven by private consumption. As household consumption becomes more important to economic growth, the role of the service sector also increases. Since the service sector is more labour-intensive than the manufacturing sector, GDP growth that is increasingly being driven by provision of services will mean that the number of new jobs created at a given pace of growth is rising. A one percentage point increase in GDP growth now creates more than one and a half million new jobs, compared to around one million jobs ten years ago.

“Because of a combination of demographic change and an economy that is generating more new jobs at a given growth rate, it will be easier to gradually guide GDP growth lower,” Johnson says.

China’s GDP growth has greatly decelerated in recent years. The slowdown has caused worries and uncertainty about how the economy will be able to withstand a continuing growth deceleration. However, Chinese policymakers emphasise that they are focusing on labour market performance rather than GDP growth. Their goal is to achieve a gradual slowdown in growth, while avoiding an overly abrupt deceleration leading to a sharp weakening of the labour market and high unemployment, which in turn would create a breeding ground for social instability.

One consequence is that large-scale official measures to stimulate the economy will only be launched if the labour market is seriously weakened.