(Bloomberg) -- The International Monetary Fund now expects China’s economy to grow 5% this year, raising its forecast from 4.6% a few weeks ago to reflect a strong expansion at the start of 2024 and additional support from the government. 

The Fund expects the momentum to continue, raising its gross domestic product forecast for next year to 4.5% from 4.1%, according to a press release published Wednesday. China is targeting growth of around 5% this year. In the first quarter it reported a better-than-expected expansion of 5.3%, although a drawn-out slump in housing continues to weigh on domestic demand. 

“We certainly are seeing that consumption is recovering but it has some ways to go,” the Fund’s First Deputy Managing Director Gita Gopinath said in an interview with Bloomberg News earlier this week. “The strength we’re seeing in public investment remains. Private investment is still weak, mainly because of the weakness in the property sector.”

The IMF has called on Beijing to provide more monetary and fiscal support for the economy, including further steps to resolve the housing crisis, which has persisted despite repeated efforts by authorities to put a floor under prices and boost demand. 

In the IMF’s Wednesday statement, Gopinath said the priority should be to “mobilize central government resources to protect buyers of pre-sold unfinished homes and accelerate the completion of unfinished pre-sold housing, paving the way for resolving insolvent developers.”

Earlier this month Chinese officials announced a new effort to shore up real estate markets, easing down-payment requirements for buyers and providing 300 billion yuan ($42 billion) of central bank funding to help local governments purchase excess inventory from developers.

Gopinath said more is needed. “Fiscal policy should prioritize providing one-off central government financial support for the real estate sector,” she said in the statement, while low inflation means there’s also room for further monetary easing.

Trade Tensions

The Fund is still assessing the effects of the recently announced US tariffs on China, according to Gopinath, who said policies that exacerbate fragmentation are negative for the whole world. 

“There has been an increase in more restrictive trade policies across countries,” with about 3,000 new trade restrictions imposed in 2023 — triple the number in 2019 — Gopinath said. 

“There has been an increase in risks to the global trading system and we are seeing early signs of fragmentation,” she said. “Trade across countries that are more geopolitically aligned is holding up better than trade across countries that are less geopolitically aligned.” 

Countries are also increasingly relying on industrial policies, which can lead to misallocation of resources and could create spillovers that affect other trading partners, Gopinath said. 

“When any of these three regions — the US, the European Union or China — puts a subsidy in place, we’ve seen that within the next 12 months, there’s a 75% probability that the other country also retaliates with another subsidy,” she said.

--With assistance from Haslinda Amin.

(Updates with more comments throughout.)

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