World Bank warns China's growth set to drop
Updated
The global economic slowdown is cutting into growth expectations across the region. Indonesia has slashed its growth forecast from an optimistic 6.3 per cent to 4.5 per cent next year. Now the World Bank has cut its forecast for the economy meant to be driving growth in the region. The Bank says China will grow by about 7.5 per cent during 2009 - down from its earlier forecast of more than 9 per cent.
Presenter: Karon Snowdon
Speakers: David Dollar, World Bank Country Director for China
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KARON SNOWDON: The World Bank's latest quarterly report on China is gloomy on first reading. Its growth won't be close to the 9% forecast in the bank's June estimate and at 7.5% for next year, it's below the magic 8% considered by many economists as the minimum needed to maintain jobs growth in China. The World Bank's Country Director for China and Mongolia, David Dollar, says the impact of the global slowdown will be sharply felt.
DAVID DOLLAR: The global situation has deteriorated much more rapidly than anyone had expected six months or nine months ago. We're going to have a coordinated recession in the United States and Japan and the Eurozone for the first time in many, many decades but we're forecasting now that this global situation will have a pretty significant impact on China.
KARON SNOWDON: Exports account for 40% of China's GDP so it's going to feel the decline in world demand which is spreading to emerging markets. The Chinese government has responded quickly to the worsening situation. Two weeks ago it announced a stimulus package of almost $US600 billion over two years. At 15% of GDP, it stunned the world - as it was meant to. Beijing wants to reassure others it will do its bit to maintain its own growth to help support the global economy. Much of it will go on infrastructure spending and rural programs. Also, there will be boosts to education, health and social security. That's increasingly important, not only as jobs are lost but as a means to keep more consumer spending power with families. David Dollar again.
DAVID DOLLAR: So that's gonna be important to really keep the economy at a good rate.
KARON SNOWDON: And is there evidence that the social security system is improving to the extent that it might be necessary - it's going to called on more in the next year or so?
DAVID DOLLAR: Yeah, we think it's improved a lot. We've done some analysis of the urban minimum income support program - it's quite effective, it's well targeted. So I think as some workers are thrown out of work, China has a safety net now that it didn't have in place 10 years ago when the Asian crisis hit, so it's a much better situation in terms of cushioning people from this blow.
KARON SNOWDON: Much of the discussion here in Australia about economic management at the moment revolves around going from a surplus to a deficit. China's government might even be facing a deficit next year, is there any concern there about that?
KARON SNOWDON: Well, on the fiscal side, we completely support the view that in this environment they should be increasing government spending and they will probably have to issue some kind of government paper to pay for some of that and I think that's appropriate in this setting. We're projecting a fiscal deficit of 2 to 3% of GDP, so at this point I think stimulus is what's really needed and a small deficit is not a big deal for China.
KARON SNOWDON: Reading your report, one of the bright spots, perhaps THE main bright spot mentioned in your report is the fact commodity prices are falling very sharply and likely to be much lower next year. Bad news for Australia but good news for China?
DAVID DOLLAR: Right, sorry about that for Australia and for my other country, Mongolia, but now we're projecting that next year China's terms of trade are going to improve by about 5%. Probably most importantly, it helps keep inflation low.
KARON SNOWDON: How important is a strong Chinese economy in the coming two years or so as the rest of the world slows down much, much more?
DAVID DOLLAR: I think it's very important. It's important to put it in perspective, you know, China's not going to rescue the world economy. It's not important enough in final demand in the world to replace the United States and Europe and Japan, which are all going into recession, but for China to keep up a healthy growth rate is a very useful contribution because it keeps things from getting worse than they would be elsewhere.
