International | Feb 18 2008
By Chris Shaw
China recorded economic growth of around 11.4% in 2007, the Bank of Finland suggesting such an outcome was ahead of the long-term potential output growth of the economy and thus an easing in the pace of growth can be expected in coming years.
On the bank’s forecasts growth should slip this year to around 10% before falling to 9% by the end of the decade, the decline reflecting in part the expected slowdown in global growth given the weakness of the US economy.
While the global slowdown will impact on export performance the bank expects the domestic side of the economy to remain strong, as investment continues to grow on the back of urbanisation and growing infrastructure requirements.
Household incomes are also moving higher as wages are trending up and the labour market is strong, which is also supporting domestic consumption and should see imports continue to increase in coming years.
One problem for the economy is inflation as shown by the 6.5% year-on-year increase in consumer prices in December, which in the bank’s view reflects a combination of higher food product prices and loose monetary policy.
The bank suggests a return to a low inflation environment will take some time to be achieved as inflation expectations have now moved higher and this will maintain upward pressure on wages, while at the same time asset prices continue to boom given negative real interest rates and high levels of liquidity.
Also contributing to the inflationary problem was the low pace of currency appreciation through 2007, the bank expecting the yuan will continue to gain on the US dollar this year and beyond as controls on the exchange rate continue to be loosened.
Overall the bank suggests risk at present is to the downside as there is scope for the US-led global slowdown to have a greater impact than currently expected, while moves to tighten monetary policy may go too far and could produce a quick slowdown in investment.
Share prices are predicted to remain highly volatile, though the bank points out there is a school of thought suggesting any significant downturn in Chinese equity prices would have a limited impact on the strength of domestic demand.
Also worthy of consideration in the bank’s view is the uncertainty of the post-Olympics environment, as once the Games are over there will be a lack of an obvious positive stimulus.
