WASHINGTON: An escalation of Europe’s debt crisis could slash China’s economic growth in half this year, the International Monetary Fund said Monday, urging Beijing to prepare stimulus measures in response.
The IMF, in an economic outlook report on the world’s second-largest economy, highlighted China’s vulnerability to global demand.
“The global economy is at a precarious stage and downside risks have risen sharply,” the IMF said.
“The most salient risk is from an intensification of feedback loops between sovereign and bank funding pressures in the euro area, resulting in more protracted bank deleveraging and sizable contractions in credit and output in both Europe and elsewhere.”
The IMF outlined the negative impact if the eurozone crisis tipped Europe into a deep recession, dragging China’s growth lower mainly due to shocks through trade.
In that downside scenario China’s growth would fall by around 4.0 percentage points this year from the 8.2 percent rate the IMF projected in January, the Washington-based institution said.
In that case, China should respond with a significant fiscal package.
“The weak external outlook underscores the importance of accelerating the transformation of China’s economy to reduce its vulnerability to the vagaries of global demand.”
The IMF forecast last month that its downside scenario would shave 1.75 percentage points off 2012 global growth, currently projected at 3.3 per cent.