Europe slump to hit China growth, warns IMF

Phoenix Herald Monday 6th February, 2012

NEW YORK - The IMF has warned of lower growth in China in view of the economic slump in Europe, and cut its forecast for the world's second largest economy this year to 8.25 per cent from 9 per cent projected last year.

The IMF also warned that Beijing should be ready to launch a multi-billion dollar stimulus to ward off a downturn in its economy.

In its China Outlook report, the IMF also said the 8.25 per cent growth could be reduced by up to 4 percentage points if Europe's crisis causes large declines in credit and output.

"China's growth rate would drop abruptly if the euro area experiences a sharp recession," the IMF said. "However, a track record of fiscal discipline has given China ample room to respond to such an external shock," it said.

"The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere," it said. "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."

The Washington-based IMF said China should cushion the impact of a deeper slowdown with measures, including tax cuts, that amount to about 3 per cent of its gross domestic product.

The IMF's forecast comes after the World Bank warned last month that China and other developing countries should prepare for a global slump which could hit harder than the 2008 downslide.

The IMF said its "global downside scenario" envisaged slower global economic activity, losses to banks on private sector lending and sovereign debt and a contraction in investment.

Chinese Premier Wen Jiabao had last week said that the government will "fine-tune" policies to support growth amid the debt crisis and the cooling domestic property market.