Economic Trend News
- WB revises China growth forecast
Date: 31-May-2007 Sources: (Shenzhen Daily)
THE World Bank yesterday sharply raised its forecast for China's growth this year but said the economy does not appear to be overheated and saw no obvious need for policy tightening measures.
In its latest quarterly update on China's economy, the bank said it now expects gross domestic product (GDP) to expand 10.4 percent in 2007, up from 9.6 percent in its February report.
It revised up its forecast of China's current account surplus in 2007 to US$340 billion, or 10.8 percent of GDP. In February it had projected a ratio of 8.3 percent.
The bank now expects consumer price inflation to average 3.2 percent in 2007, up from the 2.5 percent level it had forecast 3 months ago.
The World Bank scaled up its forecasts after surprisingly strong annual growth of 11.1 percent in the first quarter, driven by net exports and investment.
However, the report said: 'From the macroeconomic perspective, the real economy does not appear overheated.'
With the fundamental drivers for capital spending still in place -- profits, liquidity, under-priced inputs such as energy, land and resources -- the risks remain of too rapid, poor quality investment and problems this may cause for the banking system.(????)
'However, policymakers should determine their macro stance not based on whether growth is high, but based on whether growth in demand exceeds potential growth.
'Overall, demand and supply are now growing broadly in line with each other, which explains low core inflation and the absence of current account deficits and systemic bottlenecks in the real economy,' the bank said.
China calculates its quarterly GDP from production-based data. This showed growth of 10.7 percent in 2006, the fourth straight year of double-digit expansion.
However, based on recently released national accounts data, the World Bank estimates that expenditure-based GDP grew a whopping 13.6 percent in real terms last year, up from 13.0 percent in 2005 and 9.9 percent in 2004.
The key issue facing policymakers is that a fat chunk of demand is coming from abroad, which requires policies to rebalance the economy, including fiscal, labor market, pricing policies and a stronger exchange rate, the bank said.
'This means there is no obvious need for macro policies to tighten demand in the real economy,' the report said.
Thus, fiscal policy should focus on structural rebalancing as opposed to short-term demand management.
'Since tightening overall domestic demand does not appear necessary but would aggravate the external imbalance, the preferred measures to lower investment growth would be those that strengthen consumption at the same time,' the report said.
The bank repeated its long-standing call for greater exchange rate flexibility to give the central bank more control over interest rates.
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