OECD Cuts China, Japan Growth 4cast

OECD Cuts China, Japan Growth 4cast; Japan Needs Fiscal Reform

--Australia Fiscal, Monetary Tightening Should Hold Off for Now

BEIJING (MNI) - The Organisation for Economic Cooperation and Development has slashed its outlook for Chinese GDP growth this year and lowered its estimate of Japan's growth, although it remains relatively optimistic about the chances of success for ongoing economic and monetary efforts in both countries.

The OCED, in its annual Spring Outlook, also said Australia should not front-load fiscal consolidation, given uncertainties that remain about the rebalancing of the economy, adding that the Reserve Bank rate hikes should begin only in the first half of 2015.

While the OECD said Japan's efforts to discourage deflation and promote growth are working, it warned that fiscal consolidation plans need to be quickly implemented to offset a potential crisis that could hurt Japan and spill over into the global economy.

"With gross public debt surpassing 230% of GDP, a detailed and credible fiscal consolidation plan to achieve the target of a primary budget surplus by FY 2020 remains a top priority to sustain confidence in Japan's public finances," the OECD said.

It lowered its forecast for 2014 GDP growth in Japan to 1.2% from November's estimate of 1.5% growth but raised the forecast for growth in 2015 to 1.2% from the 1.0% prediction made in November.

The OECD said Japan should maintain its very easy monetary policy until the country reaches a steady 2% inflation rate and added that a second stage of sales tax hike to 10% is needed to help the government move toward a balanced budget.

But it warned that the tax increase will not be enough to ensure the success of the government's plan to have a balanced budget by 2020.

"Delaying fiscal consolidation could increase the risk of a run-up in long-term interest rates, which would have serious consequences for the financial sector, fiscal sustainability and output growth, and could have significant spillovers to the global economy," the OECD said.

On China, the cuts to the OECD growth forecast acknowledged the impact of decelerating credit growth, a cooling property market and industrial overcapacity.

The Paris-based multilateral research group now sees China's economy expanding by 7.4% this year, well off the 8.2% it projected back in November. It said 2015 growth will come in at 7.3%, slightly below the 7.5% projected at the end of last year.

The OECD said some fiscal stimulus would help support growth, while monetary conditions can be loosened in the event that a more aggressive response is needed.

That said, policies aimed at supporting growth may increase risks to financial stability and public finances, the OECD warned. In a section of its report devoted to examining Chinese financial system risk, the OECD said the success of Beijing's efforts to rein in shadow banking products and local government-linked firms is yet to be seen.

Although China's banking sector isn't that integrated with the global financial system, the spillover risks from a Chinese crisis "could be larger than expected from direct linkages alone," the OECD said, warning of a possible hit to international investor asset values and to sentiment.

"Given near-term uncertainties in the rebalancing of the economy away from investment in the natural resource sector, heavy front loading of fiscal consolidation should be avoided. Against the backdrop of the projected recovery, monetary stimulus should start to be withdrawn in the first half of 2015," the report said.

On Australia, the OECD said that while monetary policy remains accommodative, it advises keeping prudent oversight of asset markets, particularly housing, as investors account for much of the recent increase in housing loan approvals.

The OECD expects Australian growth to remain below trend at 2.5% in 2014, before rising to 3% in 2015. It expects the unemployment rate to peak at 6.1% this year and edge lower only in the second half of 2015.

New Zealand requires further monetary tightening as output continues to growth robustly but the actual path of the growth rate from a projected peak of 4.5% by early 2015 will depend on economic developments, OECD said.

--MNI London Bureau; tel: +44 207-862-7495; email: mbaccardax@mni-news.com