PARIS – China’s growth may decline to 5.5 percent in 2021 as the Asian economic giant shifts its balance from exports and manufacturing towards consumption and services, the Organisation of Economic Cooperation and Development said on Thursday, amid an ongoing trade war between Washington and Beijing.
On the other hand, Indian is bottoming out and is projected to recover to just under 6.5 percent in 2021 even though job creation remains a challenge for the country, the OECD said in the preliminary version of its economic outlook report.
However, the report noted that despite its projected rapid growth, India would be no substitute for China to drive global trade growth and traditional manufacturing.
“The Chinese economy is structurally changing, re-balancing away from exports and manufacturing towards more consumption and services,” the report said.
It said that China’s increasing self-sufficiency in core inputs for certain manufacturing sectors was reflecting a desire to move away from importing technology towards national production.
A shift in energy utilization to address pollution and the rise in services have also induced additional changes in Chinese demand for imports and as such “China’s traditional contribution to global trade growth is set to slow and change in nature,’’ the report said.
Growth has weakened and was projected to slow further amid global uncertainties and escalating trade tensions between the United States and China but “frontloading of exports in the second half of 2019 ahead of expected new rounds of tariff increases is supporting industrial production,” it said.
“A major upside risk is the alleviation of trade tensions, which would not only lift exports but also manufacturing output and investment. It would also improve consumer confidence, thus leading to stronger growth than projected.”
The OECD said that the overall investment growth in China was no longer slowing thanks to government infrastructure projects and still robust real estate investment.
It predicted that private consumption will grow steadily on the back of relatively strong disposable income gains as inflation is easing.
The OECD sad fiscal stimulus would support growth with the acceleration of new and large-scale projects in roads, railways, telecommunications (including rolling out of 5G) and energy.
For India, the OECD report said that while its economy is bottoming out, challenges remained even as Indian monetary and fiscal policies were more accommodating now than previously.
“Overall, India’s external vulnerability remains limited, with a low level of external debt compared to many emerging-market economies and predominantly long-term maturities,” it said.
The report predicted that private investment in India would bounce back as capacity utilization has grown and the cost of borrowing for the corporate sector declined along with the government’s continued reform efforts.
“The new income-support scheme for farmers and good monsoon are supporting private consumption. The cut in corporate income tax will support corporate investment. Inflation and the current account deficit will remain moderate given the relatively large spare capacity in the economy and low oil prices.”
Job creation, however, remains a challenge in a country where, according to the CARE rating agency, the pace of employment growth has slowed down to 2.8 percent in 2018-19 from 3.9 percent in 2017-18.
The OECD said there was some room left for more accommodation in monetary policy remains as the large cuts in policy rates since the start of 2019 have not yet been fully reflected in lower lending rates.
“Further reforms to improve financial sector soundness and the ease of doing business are needed to revive corporate investment. Re-building fiscal space will be key to finance better infrastructure and public services. Tax reforms are needed to broaden the property and personal income tax base.”
It said that stress in non-banking financial companies, coupled with changes in insurance regulations, had affected car sales in India which, along with volatile fuel prices, have weighed on consumer confidence.
“Construction has been hurt, as non-banking financial companies contribute a large share to its financing, weighing on job creation, income and consumption. Industrial production and related imports have weakened.”