Goldman takes a knife to China GDP forecasts on Monday

Goldman Sachs slashed Monday its forecasts for China’s growth over the next three years amid broadening pessimism over the health of the world’s second largest economy.

The bank marked down its 2016, 2017 and 2018 projections to 6.4 percent, 6.1 percent and 5.8 percent, respectively from 6.7 percent, 6.5 percent and 6.2 percent, previously. The government is targeting growth of “around 7 percent” this year.

The more gloomy assessment by Goldman is the latest setback for China which has had a tumultuous few weeks. The move by the country’s central bank to devalue the renminbi earlier this month startled investors and roiled equity markets the world over. Having seen a feeble impact from efforts to prop up jittery stock markets, Chinese authorities are now reportedly scaling back their market intervention plans.

Goldman’s longer-term growth forecasts are based on three factors – labor, capital and productivity.

“In China’s case, each of these three components is expected to decelerate: labor due to demographics, capital deepening as the capital share of the economy comes down from exceptionally high levels, and total factor productivity growth as the economy narrows the gap with the richest economies,” it said.

As for 2015, the bank retrained its forecast of 6.8 percent growth. This would mark a notable deceleration from last year, when the economy expanded 7.4 percent.

“The economy faces heightened economic and policy uncertainty at the present time,” the bank said. “This reflects extreme equity market volatility and more recently the sudden move in the CNY fixing, which has amplified uncertainty about the path of the exchange rate going forward.”

“Our estimates suggest it takes a few months for the full impact of ‘uncertainty shocks’ to hit the economy, suggesting downside risk to August and probably September activity data,” it said.

The earliest economic indicator available for August – the preliminary Caixin manufacturing purchasing managers’ index (PMI) – suggests persistent sluggishness in country’s vast factory sector.

The index fell to a near six-and-a-half-year low of 47.1 in August, below a Reuters forecast of 47.7 and down from 47.8 in the previous month.

Source: CNBC