World Bank raises China GDP forecast - Beijing faces sharply rising deficit

World Bank raises China GDP forecast - Beijing faces sharply rising deficit
By Jamil Anderlini in Beijing
Copyright The Financial Times Limited 2009
Published: June 18 2009 05:29 | Last updated: June 18 2009 12:50
http://www.ft.com/cms/s/0/5f7abf38-5bc0-11de-be3f-00144feabdc0.html


A sustainable recovery is not yet assured in China despite the government’s large fiscal stimulus package and Beijing may have little room for additional measures this year, the World Bank said on Thursday.

The bank raised its forecast for 2009 gross domestic product growth to 7.2 per cent, saying the apparent success of the government’s Rmb4,000bn stimulus package had improved the outlook from March when the bank predicted 6.5 per cent growth for the year.

“Government influenced investment will strongly support growth in 2009. However, there are limits to how much and how long China’s growth can diverge from global growth based on government influenced spending,” said Ardo Hansson, the World Bank’s lead economist for China. “It is too early to say a robust sustained recovery is on the way.”

With government revenues falling and expenditure rising rapidly, the bank predicts China’s fiscal deficit will rise to almost 5 per cent of GDP this year, well above the 3 per cent of GDP budgeted by Beijing and a large jump from last year’s deficit of 0.4 per cent of GDP.

“On current projections, it is not necessary and probably not appropriate to add more traditional stimulus in 2009,” said Louis Kuijs, senior economist and main author of the quarterly update released on Thursday. “One reason is that the fiscal deficit is on course to be significantly higher than budgeted this year and additional stimulus now would reduce the room for stimulus in 2010.”

Market-based investment and consumption are unlikely to rebound until the rest of the world starts to recover convincingly and the collapse in Chinese exports is reversed. Chinese exports fell by around one quarter in the first five months of the year from the same period a year earlier.

China’s economy grew 6.1 per cent year-on-year in the first quarter, faster than any other major country but well below the government’s full-year target of 8 per cent.

The World Bank said it expects China’s economy to grow 7.7 per cent in 2010, a much slower pace than the 13 per cent reached in 2007 and below the 9 per cent rate of last year.

The bank estimates a full 6 percentage points of this year’s 7.2 per cent GDP growth will come from investment and spending either carried out by the government or directly influenced by it.

The government stimulus package has largely been directed towards new infrastructure projects and other fixed asset investments, raising the already very high proportion of China’s growth generated in those areas.

Beijing has been trying for years to shift its growth model away from investment towards a more consumption-driven economy but has struggled to make progress, in part because the absence of state-funded social welfare convinces households to save a high proportion of their income.

“There are limits to how much additional infrastructure-oriented stimulus can be spent effectively and efficiently,” yesterday’s World Bank report said. “If policymakers are concerned about the adverse consequences of the downturn for households, it is less costly to address these by using and beefing up the social safety net.”