June 10, 2015 / 6:54 AM / in 2 years

China's economy to pick up in second half: central bank economists

An employee watches as steel bars are lifted by a crane at a steel factory of Dongbei Special Steel Group in Dalian, Liaoning province March 13, 2013. REUTERS/China Daily

BEIJING (Reuters) - Economists at China’s central bank have sharply lowered their inflation forecast for 2015, while predicting a pick up the world’s second-biggest economy during the next six months thanks to more stable home prices and firmer foreign demand.

In a report posted on website of the People’s Bank of China (PBOC), the economists forecast annual inflation of just 1.4 percent this year, lowering their estimate from 2.2 percent earlier.

The report specified that the estimates represented the view of the economists and not that of the PBOC. The economists were cautiously optimistic, despite downward revisions to other forecasts that reflected the headwinds faced by the stuttering economy.

China’s sagging property market is “starting to stabilise” and the world economy should show further signs of recovery in coming months, said the economists who were led by Ma Jun, the cental bank’s chief economist.

Looser monetary policy conditions as a result of China cutting interest rates three times since November were also expected to help shore up growth in coming months, the economists said.

“We have reasons to expect some modest recovery in sequential growth in the second-half of this year,” they said.

The economists noted that it takes six to nine months for China’s economy to feel the benefits of monetary policy easing.

The report showed the economists had shaved their forecast for China’s economic growth to 7.0 percent for 2015, from 7.1 percent previously.

Dragged by a cooling housing market, anaemic domestic and foreign demand and stuttering local investment, China’s economy grew at its weakest pace in six years in the first quarter, expanding 7 percent.

There are few signs that the downturn is abating. China’s imports shrank more sharply than expected in May, data showed earlier this week, strengthening investor bets that Beijing must further relax policy.

Worries over deflationary pressures were reflected in a sharp downward revision to the economists’ forecasts for producer prices, with the index now expected to fall 4.2 percent, marking a far sharper drop than the 0.4 percent decline foreseen earlier.

Kevin Lai, an economist at Daiwa in Hong Kong, reckoned the central bank econmists were being too optimistic with their forecast for a recovery in growth during the next six months.

“We are not sure why the PBOC economists think it will get better,” Lai said. “We think the second-half (of the year) will be more difficult. Deflationary pressure will be stronger.”

Falling producer prices and slowing consumer inflation will lift borrowing costs in real terms, further squeezing companies already buffeted by weak orders, Lai said.

He also doubted whether any turnaround in the housing market would be strong enough to offset weakness elsewhere.

The PBOC economists acknowledged China’s sluggish domestic demand, saying the housing slump and falling global commodity prices had limited spending.

But they predicted that China’s housing market could soon turn the corner, spurring new investment in the next six to nine months.

The report said housing investment has cooled twice as fast as previously forecast, and was down 10 percentage points in the first four months of 2015 compared with a year earlier.

“The recent measures introduced to stabilise (economic) growth will show their effects in the next few months,” they said.

Below is a table of the revised forecasts by the PBOC economists. All forecasts are for 2015 and are measured in percent change from the year earlier period.

Forecasts with an asterisk are measured as percentage of GDP.

Indicator New f‘cast Old f‘cast

Real GDP 7.0 7.1

Fixed Asset Investment 12.6 12.8

Retail Sales 10.7 12.2

Exports 2.5 6.9

Imports -4.2 5.1

Trade surplus* 4.8 3.8

Current account surplus* 2.9 2.4

CPI 1.4 2.2

PPI -4.2 -0.4

Reporting by Koh Gui Qing; Editing by Simon Cameron-Moore

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