Economy: IMF says China growth could fall due to EU recession; EU leaders pressure Greece on bailout terms

Updated On: Feb 07, 2012

Economic growth in China could drop by half this year in the event of a sharp recession in Europe, according to a new IMF report. The IMF said China should be prepared to sharply stimulate its economy. But over in Europe, pressure is mounting on Greece to meet the conditions of a bailout, with European leaders saying time is running out.

IMF China Economic Outlook

The weaker global economic environment has lead the IMF to lower their growth forecasts for China. Financial volatility in Europe could drag China's growth lower.

"The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand," said the report by the IMF's resident representative office in China.

China would be highly exposed through trade linkages, as Europe and the United States together account for nearly half of China's total exports. Lower global demand would ultimately further reduce investment, employment and growth in China, triggering a decline in China's property market. In the absence of a domestic policy response, China's growth could fall by around 4 percentage points.

"In the unfortunate event such a downside scenario becomes reality, China should respond with a significant fiscal package, executed through central and local government budgets."

"In particular, a front-loaded fiscal stimulus of around 3 percent of GDP spread out over 2012–13 would limit the growth decline to around  1 percent, cushioning the adverse effects on employment and people’s livelihoods."

The IMF also urged China to run a federal deficit of 2 percent of GDP rather than looking to reduce the country's deficit as planned, given the uncertainty in the global economy.

Full Report: China Economic Outlook (PDF) [IMF, 6 Feb 2012]

Report: IMF Urges Beijing to Ready Bold Moves [Wall Street Journal, 6 Feb 2012]

Report: IMF warns China on eurozone fallout [CNN (Financial Times), 6 Feb 2012]

PM Lee on China

Singapore Prime Minister Lee Hsien Loong has expressed optimism regarding China, saying he thinks "there may be a rough landing, but they will get through it".

He made the comments in an interview with journalist and author Fareed Zakaria on CNN.

"I can't say that there will be no bumps in the short term. But I think in the long term, the trend will be up," he explained.

"They've built a lot of infrastructure. They have built a lot of capacity in many industries, autos, some of the electronics industries. But it's an economy which is growing very rapidly, urbanising very rapidly, needing a lot of facilities, whether it's roads, hospitals, schools, houses, by the millions. And every year, 1 per cent of the population is moving into cities, which means 13 million people needing all this infrastructure."

In response to Mr Zakaria's question on whether China will be trusted as the dominant power in Asia, PM Lee said:

"Every superpower or big country has to be looked on with a certain careful respect by others not quite so huge. Even the United States. But the US, after 70, 60-plus years in the Pacific, since the war, is still welcomed and is still considered benign. And that's really a good example for the Chinese to seek to emulate."

Transcript: Of superpowers and the small boat S'pore [TODAY, 7 Feb 2012]

China Bans Airlines from EU Emissions Trading Scheme

Meanwhile, China has "banned" all airlines in the country from joining the European Union's Emissions Trading Scheme (ETS) aimed at cutting carbon emissions.

Chinese authorities have also barred the airlines from increasing their fares or adding new charges for the scheme.

The EU scheme, implemented from 1 January, levies a charge on flights in EU airspace based on carbon emissions. The tax has come in for severe criticism not just from China but also from other countries such as the US and Canada. Given the global economic conditions and an uncertain outlook for the travel industry, airlines are wary of the scheme hurting their profits.

The EU has yet to react to China's move. Analysts say the EU could retaliate by barring Chinese airlines from the EU, but this would prompt retaliatory action. Given the differences between the various parties involved, the matter may have to be resolved by an international body.

Report: China 'bans' airlines from joining EU carbon scheme [BBC, 6 Feb 2012]

Indonesia's Economic Growth

Elsewhere in Asia, Indonesia's economy grew last year at its fastest pace since the 1997-1998 Asian crisis, according to the latest official figures.

South-east Asia's largest economy expanded by 6.5 percent in 2011, and analysts say growth is likely to remain strong going forward.

Indonesia's vast domestic market helped to shield it from the global economic turmoil battering its more export-oriented Asian neighbours. Domestic consumption accounts for nearly 60 percent of Indonesia's economy.

In recent years some investors have touted Indonesia as the next India or China. Its strong growth and relative political stability boost confidence in its fortunes, though some complain Indonesia still lacks legal protections and infrastructure.

Foreign direct investment in Indonesia grew 20 percent to a record US$20 billion last year.

Report: Indonesia's economy grows at fastest pace in 15 years [BBC, 6 Feb 2012]

Report: Indonesian Economy Expands 6.5% [Wall Street Journal, 6 Feb 2012]

Greece Bailout

European leaders have stepped up pressure on Greek politicians to meet the conditions of a €130 billion (US$171 billion) bailout.

Negotiations in Greece have already dragged on long past the original deadline.

“I can’t quite understand why we need a few more days,” German Chancellor Angela Merkel said in a joint press briefing with French President Nicolas Sarkozy. “Time is running out.”

Greece's political leaders have to accept another package of deeply unpopular wage and pension reductions, job cuts and tougher tax enforcement measures.

Greek politicians are resisting many of the cuts.

Allowing Greece to go bankrupt “isn’t an option,” Mr Sarkozy said. At the same time, there can be “no community money” without reform. “The Greek government must do its homework and carry out its responsibilities,” he said.

Athens is playing host to parallel domestic and international negotiations. Officials are also trying to persuade Greece’s private creditors to accept bigger writedowns on their debt holdings.

The IMF's chief economist, Olivier Blanchard, said it looks like the 'haircut' on Greek private debt will be "very large".

He said Greece needs a "dramatic" reduction in its public debt. The IMF has said Greece needs to cut its debt to 120 percent of gross domestic product by 2020 - from nearly 160 percent now - to put its economy on a sustainable path.

Report: Time Is Running Out for Greece to Accept Bailout Conditions, Merkel Says[Bloomberg, 6 Feb 2012]

Report: IMF's Blanchard sees "very large" Greek haircut [Reuters, 6 Feb 2012]

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