Global slowdown set to hit China and India

A slowdown in the global economy is set to hit emerging giants China and India, but also bring a respite from inflation, while Japan is still set for a rebound, the OECD said on Monday.

But an aggravation of the eurozone debt crisis, which the Organisation of Economic Cooperation and Development considers the key risk to the world economy, would also hit emerging markets it warned.

"The emerging market economies would not be immune, with global trade volumes falling strongly, and the value of their international asset holdings being hit by weaker financial asset prices," it said.

If the eurozone manages to contain its crisis the OECD sees Japan receiving a boost from post-quake and tsunami reconstruction, while breakneck Chinese and Indian growth slows due to efforts to rein in inflation and weakening global trade.

"The recovery in the OECD area has now slowed to a crawl, notwithstanding a short-lived rebound from the restoration of global supply chains disrupted by the Japanese earthquake and its aftermath," the OECD said on releasing its latest set of forecasts.

"Emerging market output growth has also continued to soften, reflecting the impact of past domestic monetary policy tightening, sluggish external demand and high inflation," added the OECD, which unites the world's 34 most advanced countries.

Post-quake and tsunami reconstruction should close reduce the contraction this year to 0.3 percent from the 0.9 percent it expected this spring, the OECD said. Growth should rebound to 2.0 percent next year. 

But "after an initial rapid rebound in activity following the earthquake and the Fukushima disaster, the pace of the recovery is now moderating," warned the OECD.

Emerging powerhouse China should see growth slow to 9.3 percent this year from 10.4 percent last year. A slowdown in world trade will brake growth to 8.5 percent in 2012 before it climbs to 9.5 percent in 2013.

The OECD said "output growth in China is projected to be well below potential in the near term" as soft demand for its goods abroad is mostly compensated by domestic demand.

A halt in the growth of commodities prices should help restrain inflation, with growth in consumer prices slowing from 5.6 percent this year to 3.8 percent for the next two years.

"As inflation and monetary conditions ease, GDP is expected to pick up from around the middle of 2012 and to grow at rates close to 10 percent through 2013," said the OECD.

Developments in inflation and the red-hot housing market should allow China's central bank to begin lowering interest rates from mid-2012.

It suggested as a "useful first step" in loosening monetary policy would be for Chinese authorities to "manage the exchange rate with reference to a clearly-defined basket of currencies."

The Unites States and other countries have accused Beijing of benefiting from keeping the yuan at an artificially low exchange rate and have pushed for it to appreciate and eventually become covertable.

In India, the OECD expects growth to remain "subdued" due to the weak world economy and efforts to rein in inflation.

Growth should slow down from 8.8 percent last year to 7.6 this year, and slow further to 7.5 percent in 2012. An improvement in the global economy and a slowdown in inflation should help growth pick up to 8.4 percent in 2013.

Inflation should slow to 7.9 percent this year, then to 7.5 percent in 2012 and 6.5 percent in 2013.

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