Echo

China now expected to grow 6.5% in 2009

Wednesday, March 18, 2009

In a series of downward revisions, the World Bank is the latest to reduce its forecast of 2009 economic growth in China. As with many export-led economies, China has been hit hard by the precipitous decline in export demand, falling 25.7% in February 2009. For this reason, the World Bank reduced its 2009 growth forecast for China 1% to 6.5%. You can watch the World Bank's quarterly update on video here.

The new World Bank forecast is in line with that of the IMF; the IMF downgraded their forecast of 2009 Chinese economic growth to 6.7% at the end of January. Although 6.5% is well above zero, and certainly not comparable to the industrialized world's economic growth rates - the World Bank's 2010 growth forecast for high income OECD economies is 2.0%, or 6% below that of China - but it is well below Chinese potential growth.

The Chinese government recognizes that export-led growth is not sufficient in the current economic environment. In addition to supporting its export sector - the government plans to reduce export taxes to zero - the Chinese government is focusing on the domestic economy with fiscal stimulus measures and promoting domestic consumption. The fiscal stimulus already in place (4-trillion yuan announced in November) is probably passing through to the economy, as China's PMI increased for the third consecutive month in February.

Chinese growth is expected to improve in 2010, where the World Bank forecast is 8.0%. However, China, like any other country, is subject to diminishing returns to capital investment. Eventually, growth will fall as the economy joins the ranks of the higher income economies, however, that is still decades off.

Rebecca Wilder

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