On Wednesday the IMF and Paris-based OECD both cut their growth outlook for China, as the world’s second largest economy is still coming to terms with the fallout of weaker global demand and a slowing economy that is still heavily dependent on outside investment.
China’s economy is expected to grow by 7.75% in 2013, the IMF announced on Wednesday, down from the 8 percent growth rate that was forecast earlier in 2013.
The IMF cited the need for Beijing to pay close attention to its explosive credit growth that has helped to fuel its economic rebound while encouraging the Chinese government to adopt market oriented reforms and contain some of the risks that come from the rapid rise in lending such as the increased vulnerabilities to investments that might be of poor quality and may lead to default.
“While China still has significant policy space and financial capacity to maintain stability even in the face of adverse shocks, the margins of safety are narrowing and a decisive impetus to reforms is needed to contain vulnerabilities and move the economy to a more sustainable growth path,” the IMF said in a statement.
Meanwhile, the OECD cut its 2013 growth rate for China, a non-member country to 7.8 percent, down from 8.5 percent, citing weaker global demand.
In the first quarter of 2013 China’s GDP lowered to 7.7 percent while the Chinese government has established a growth target of 7.5 percent for the country as economic policy reforms are still undergoing transformation in the country.
The OECD said that China’s growth rate could improve to 8.4 percent in 2014 amid increased policy support.
The OECD mentioned that global growth is improving unevenly while historically high unemployment levels remain a risk to governments, especially in Europe.
Unemployment is likely to continue to increase further in the euro-area, stabilizing above 12% only in 2014.
“The global economy is strengthening gradually, but the upturn remains weak and uneven,” said OECD Secretary-General Angel Gurría.
“Supportive monetary policies, improving financial market conditions and a gradual restoration of confidence are at the root of the recovery” Mr Gurría stated.
According to the OECD, in the U.S. domestic growth is projected to rise by 1.9 percent in 2013 and 2.8 percent in 2014.
GDP in the euro-area is expected to decline by 0.6 percent in 2013 and then rebound by 1.1 percent in 2014.
In Japan GDP is expected to grow by 1.6 percent in 2013 and 1.4 percent in 2014.
Exiting Monetary Stimulus
The OECD said that a major risk to the U.S. economy is the unwinding of its monetary stimulus programs which has helped to push interest rates lower, stabilize the U.S. housing market, and drive equity markets higher.
Pier Carlo Padoan, OECD’s deputy secretary-general and head economist, admitted that the unwinding of an aggressive monetary stimulus program that is currently set at $85 billion in bond purchases each month could present some new challenges for the U.S.
“Exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth.”