China 2009 growth rate will hit 19-year low says World Bank

Right after we posted on why the global financial crisis will hit China harder than the US and Europe, the World Bank published its estimate for 2009 growth (h/t Managing the Dragon and The Standard HK):  7.5% growth, which represents a 19-year low.  In my previous post, I shared that many economists think that 9.0% growth is needed to fully absorb the new market entrants and to maintain the current unemployment rate, which is somewhere between 4.0% (official) and 10% (worst case unofficial).

Managing the Dragon has a nice summary, which I’ll excerpt here:

Growth will slow to 7.5 percent in 2009 as the global financial crisis takes a greater toll. (Revised down from its previous forecast of 9.2 percent growth next year.)

Beijing’s multibillion-dollar stimulus plan will help smooth the sharp edges of steep declines in global and domestic demand. China’s downturn — signs of which emerged in the third quarter — will worsen in the first half of 2009 as exports weaken.

7.5 percent growth in 2009 will represent the weakest since 1990 when it was 3.8 percent, and just below the 7.6 percent reported in 1999.

In an earlier post, Managing the Dragon’s Jack Perkowski made a great point about the relative size of China, and that even if it were delinked from the global economy (which it is NOT) it is simply too small to save the day:

For all of its double-digit growth over the past five years, and despite the fact that it has most likely already surpassed Germany as the third-largest economy in the world, China’s GDP in 2007 was just under $3.3 trillion, or only 6 percent of global GDP. No matter how fast China grows in 2009, it simply cannot by itself offset the impact of recessions in the United States and Europe. In fact, there is no country or region of the world that can.

For the record, the five largest economies in the world in 2007 were: (1) the United States at $13.8 trillion; (2) Japan at $4.4 trillion; (3) Germany at $3.3 trillion; (4) China at just under $3.3 trillion; and (5) the United Kingdom at $2.8 trillion.

Michael Pettis expects that the World Bank will be continuing to revise their projections downward.  He also comments that the ruling party in China will use all the policy tools they have by virtue of their authoritarian control, which includes suppressing demonstrations and pressuring businesses not to lay off people:

The government has also warned, more than once, that as a consequence of the slowdown they expect an increase in social disturbances (a euphemism for rioting). They are also trying to control the process of layoffs, with some provinces requiring companies to get approval before they fire more than a certain number of workers.  This obviously can have negative impacts on the adjustment process for businesses, but I think that one of the ways that China can boost private consumption is by various forms of income redistribution, and raising minimum wages and preventing firings may have some positive impact here.

This is another example of the pragmatic approach that China’s leaders have to address this downturn.  For those of us with a strong grounding in the principles of free speech, free markets and minimal government interference with business, the idea of preventing layoffs and preventing rioting seem highly objectionable.   But some might say that these policy tools will be well used to deliver the right mix of stability and growth to China during these difficult times.  All I can say is that I’m glad I’m not running China.