China's 2009 Growth: Bidding Downwards

A couple of weeks ago I wrote a piece speculating that the gathering gloom and doom about China's economic performance in 2009 might be overblown, in part because some of those making the predictions like perennial pessimist Nouriel Roubini of New York State University weren't  China specialists and therefore might well have missed some of the things that would make China different from other economies in this downturn and allow it to hit seven or eight per cent GDP growth. Well, it looks like that was plain wrong and the gloomsters were right. One of the economists I quoted was Ben Simpfendorfer of the Royal Bank of Scotland, who said he was sticking to his eight plus forecast for 2009 despite the fact that his boss, the bank's chief Asia economist, had put his estimate at a scary 5 per cent. What a difference a few weeks make. Ben just sent this note out:

 

We forecast China's GDP growth at 5% next year down from our previous estimate of 8%. This will feel like a recession to the average citizen. The new forecast assumes GDP growth falls as low as 4%YoY in the first half of 2009 before recovering in the second half as fiscal easing and base effects gain in influence.

- A sharp drop in the major GDP growth drivers, specifically, household consumption, residential investment, and exports, explains most of the slowing. Government spending and inventories provide offsetting support, especially in 09H2.

- The unfolding credit squeeze remains a downside wildcard in the outlook. Banks and suppliers are generally much less willing to extend credit now. We have taken this into account in our forecasts, but it's very difficult to gauge the full impact of credit contraction in China.

- No V-shaped recovery is likely. The three main drivers of GDP growth in the past five years will not recover rapidly. GDP growth will not return to a 10% or higher rate of growth in the immediate future. Instead, GDP growth in 2010 is forecast at 7.5%.