Posted by: Frederik Balfour on June 18, 2009
The World Bank’s China Quarterly Update released today in Beijing contained some good news, and some not-so good news. First the good news: the Bank has raised ts forecast for GDP growth in 2009 to 7.2% as against its March forecast of only 6.5% growth for this year. Although the March report made no projection for 2010, the June report expects the Chinese economy to expand at 7.7%. This reflects a growing consensus view that China’s $586 billion fiscal stimulus package is doing the trick.
Now the not-so-good news. The World Bank projects China’s fiscal deficit as a percentage of GDP will hit 4.9% this year, a major upward revision from its March forecast of only 3.2% deficit. This reflects not only the impact of the fiscal spending, but also lower-than-expected revenues, largely because of an increase in VAT export rebates. This is a whopping increase over the 0.8% 2008 deficit, and considerably higher than the government’s budgeted amount of 3% this year. The Bank warns that if China tries to goose the economy further this year—which it might be tempted to do in order to reach its official growth target of 8% [the level generally accepted necessary to generate enough jobs to accommodate new entrants to the labor force] then it will hamper its ability to stimulate the economy in 2010.
But how serious is this matter? The World Bank admits China’s fiscal position is strong enough to handle the deficit. After all, China has nearly $2 trillion in foreign reserves, and with economic growth that other countries can only dream of, tax revenues will continue to grow. And as any Keynesian will tell you, deficit spending is exactly what a downturn needs, And it’s also what the rest of the world needs too. Although China still runs a trade surplus, it’s still a huge importer too. China’s economic engine may not be strong enough to pull the rest of the world out of its slump, but if China weren’t growing, the global picture would be even worse.