China to drive world economy: Economist
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China to drive world economy: Economist

While Chinese policymakers appear to be moving to prevent economic overheating, there was little sign of action in the US.

india Updated: Jan 25, 2006 19:40 IST
Agence France-Presse
Agence France-Presse

Deepening concern about US deficits and a possible oil supply shock are weighing on a world economy that will be driven largely by China during 2006, a panel of leading economists predicted at the World Economic Forum on Wednesday.

"This is the year to watch out carefully for the end of the great American spending binge," Stephen Roach, chief economist at US bank Morgan Stanley, told the annual meeting of global business and political leaders.

Just hours after China announced that its economy had grown by 9.9 per cent in 2005, the panel said Chinese growth was set to continue at the kind of pace that helped it leapfrog over Britain to become the world's fourth-biggest economy.

However the four economists cautioned that while Chinese policymakers appeared to be moving to prevent their economy overheating, there was little sign of action in the US to tackle imbalances in the US economy.

Roach cautioned that investors in the US appeared to be "plugging ahead irrespective of current account issues and the asset price bubble".

He added: "What's occurring right now in markets and in policy circles is a dangerous degree of complacency. And out of complacency ususally comes the surprise that ends up doing the most damage to markets and economies."

The danger lurking behind the high US current account deficit is that foreign investors begin to lose confidence in the US economy and start withdrawing their assets.

This would cause a fall in the value of the dollar which could lead to a growth-dampening increase in interest rates.

Roach also said data from the US indicated that "the property bubble is nearing an end", potentially drying up the last source for the spending spree.

The panel warned that other parts of the world such as Asia -- where savings levels are high -- would need to compensate for a forthcoming slump in US consumption.

"When the US increases its savings -- and it must increase its savings -- that will reduce aggregate demand in the world," said banker Jakob Frenkel of American International Group.

"This is the time the rest of the world must reduce its savings to make up for the slack. That's the tango principle," he added.

The focus was on China, where growth fuelled by export demand is set to reach 8.8 to 9.3 percent in 2006, according to Min Zhu, executive assistant president Bank of China.

"I would say Chinese GDP (gross domestic product) is still underestimated," he added, pointing to "millions" of small and medium-sized businesses that were not accounted for in domestic economic data.

"There is still room for China to grow."

Meanwhile concern also focused on the potential for a bottleneck in energy supplies due to a shortage of refinery capacity, or political problems, rather than simply price rises.

"The real question is what is the probability of a supply shock on the energy front," Laura Tyson of the London Business School underlined.

First Published: Jan 25, 2006 19:40 IST