PM Key says IMF picking growth of about 8.25% for China in 2013; 'Good news for NZ if it comes true'

By Alex Tarrant in Tokyo

It’ll be good news for the New Zealand economy if the IMF’s growth forecast for China next year turns out to be true, Prime Minister John Key says.

IMF Managing Director Christine Lagarde addressed leaders at the Asia-Pacific Economic Co-operation forum in Vladivostok, Russia, on Sunday.

Key, now in Japan, gave a speech on Monday evening touching on comments Lagarde made at APEC.

He told media with him in Japan that Lagarde had been fairly realistic in her comments about global growth.

“Her China forecasts were quite strong for 2013, so if the IMF are right, then that’ll actually be quite good news for New Zealand,” Key said.

“She’s picking growth of about 8.25% for China for 2013.”

The New Zealand Treasury forecast Chinese economic growth of 8.3% in Budget 2012 in May. Treasury forecasts the growth rate to then fall to 8.0% in each of the following three years.

Global growth pick based on China

Speaking later on Monday to a business audience in Tokyo, Key said the IMF's view was that global growth in 2012 would come in under 4%.

"While that sounds impressive, we starting to see some of the very fast-growing economies around the world registering very low levels of growth," Key said.

“Brazil in particular is an obvious example of one of the fast-growing economies that’s now experiencing a real concern, with commodity prices being off quite a lot," he said.

Lagarde was “a little bit more optimistic” on global growth in 2013, estimating it would be above four percent.

“But that’s partly predicated on China growing at eight and a quarter percent in 2013. I think she would admit that there are risks in that scenario, although they ultimately remain very confident about what we’re seeing in China," Key said.

China was a critical market for New Zealand’s economic future, with two-way trade on a path from NZ$13.5 billion currently to hopefully NZ$20 billion by 2015.

NZ sees risks

Meanwhile, New Zealand saw some risks with regard to global growth.

“The first of those is Europe. We are reasonably concerned about the outlook for Europe,” Key said.

“If you look at the basic economic fundamentals in Europe, then they portray quite a bleak picture. You have very high levels of government debt, you have falling levels of competitiveness and productivity, reasonably inflexible labour markets, high levels of bureaucracy, and entrenched levels of welfare dependency," he said.

“From New Zealand’s perspective, we at least look at Europe with some concerns. Not because it’s our largest trading partner by any measure – it’s fourth overall. [It’s] still a market for some high value goods, and particular markets within Europe are important to us – Germany and France being two of the obvious ones."

But Europe was obviously a big factor when it came to Chinese growth.

“China’s largest market is Europe, and as Europe slows down, that is definitely having an impact on China’s capacity to continue to grow at eight-plus percent. So we see in Europe some real issues, and not an easy way to resolve those issues," Key said.

“We think that there are real and potential risks of at least a long and protracted period of low levels of growth in Europe, and almost certainly a recession in Europe in 2012," he said.

US govt contraction could be significant

The second risk was the fiscal cliff in the United States, with the Bush tax cuts are due to expire at the end of the year.

“That will take some stimulation out of the economy in the United States," Key said.

"Secondly, you are seeing both political parties – so irrelevant of the election result – arguing that they will be trying to get back on the track towards surplus at some point, addressing the enormous deficits that are present in the United States," he said.

“We’ve already seen them bumping up against their debt ceiling earlier this year, and the impact that slow response had, with rating agencies downgrading the United States.

“So it’s possible that contraction could be quite significant in the United States, if they really do step up and address those deficit issues, in which case, you can’t rule out the fiscal cliff having quite an impact on US growth," Key said.

Food inflation could lead to rate hikes

The third risk was the potential for global food price inflation, due poor growing conditions currently around the world.

“What we certainly see is a world that is going to be demanding a lot more food. The world is on a pathway...by 2050 to have 9.3 billion people. Unquestionably they are going to demand not only more food, but in our view higher quality food," Key said.

“So that is also a risk – that food inflation, and potentially inflation in other areas like oil start to push up global inflation rates," he said.

"If that did occur, and governments were forced to respond by lifting nominal interest rates, that would have a very big impact on a country like the United States, where they have very large levels of government debt and some significant issues to confront if inflation started to emerge.

“So all of that tells you it’s quite an unclear picture, and not without its risks," Key said.