The World Bank’s latest Global Economic Prospects makes grim reading. It forecasts that the continuing ripple effects from the 2008 global financial crisis will slow world economic growth to 2.5% this year, with the eurozone contracting. In June, the Bank had forecast 3.6% growth for the global economy. “Even achieving these much weaker out-turns is very uncertain” the report’s lead author, Andrew Burns, writes on his Bank blog. The world faces “a year fraught with uncertainties”.
For China, the Bank forecasts that GDP growth will fall to 8.4% in 2012, down from 2011′s 9.2%. June’s forecast had been for 8.7% growth this year. As the Bank points out, 8.4% growth is “still robust” and it expects authorities “to continue to dampen ‘overly-fast’ growth in a number of economic sectors”. It adds that “the prospects for a soft landing for China remain high”.
Nonetheless it sees three downside risks to its growth forecast: trade growth slows even further in the event of a serious deterioration in Europe’s economies; the capital outflows from emerging economies, including China’s, seen in recent months turn into full spate; and China’s real estate market, which the Bank says is arguably still overinflated, weakens further. Local government borrowing and bank balance sheets are co-joined risks.
In June, the Bank had forecast growth would pick up modestly in 2013, to 8.8%. Now, it says growth will slow further next year to 8.3% “in-line with the country’s longer term potential growth rate”.
That pace of growth is starting to skirt the 8% that is always held up as the minimum needed to ensure social stability. It may force some concentration of minds on the need to push through structural reform to rebalance the economy away from export- and investment-led growth to domestic consumption. Or it may just make nervous party leaders in the midst of a leadership transition more determined to hunker down.
Footnote: This is the Bank’s summary of China’s prospects, from the East Asia-Pacific regional sector of the outlook:
In China, the lagged effects of monetary policy tightening (both in terms of interest rates and regulatory adjustment) are expected to combine with weak external demand to slow GDP growth from 9.1 percent in 2011 to 8.3 percent by 2013. The bulk of activity is expected to come from domestic demand―with private consumption and fixed investment contributing 3-and-4 percentage points to GDP in 2012―while net exports afford only a modest 0.2 point addition to growth. Inflation is anticipated to decline; and monetary policy relaxation could be in the cards during 2012. Key domestic risks for China are the property sector, local government borrowing, and bank balance sheets; but the baseline scenario envisages that policy will focus closely on these aspects, with efforts sufficient to stem systemic effects on the economy.