Forecast for the Chinese Economy

The Chinese economy has been growing at breakneck speed, creating unprecedented levels of wealth for a certain section of the Chinese society. However, despite the recent improvements and periods of growth there are many factors which could cause serious problems for the Chinese economy in the future. I feel that the Chinese government have become a little complacent, assuming that fast growth in the past will be easy to maintain, but, this is not necessarily the case.

What Could Cause Problems for the Chinese Economy

Inflation.

Inflation in China has been creeping up for a quite a while. Although this is partly due to specific problems with food inflation, it is also an indication that Chinese growth is exceeding its capacity to keep up with demand. This is due to the governments expansionary fiscal and monetary stance. Despite growth of 10% a year. Interest rates are only slightly higher than inflation. Therefore, it is hardly surprising that inflation is increasing. If the government do not act to reduce inflationary pressures, there is a real chance of an inflationary boom which comes to a sticky end, with prices spiralling out of control. When inflation gets over 10% it will become increasingly difficult to reduce inflation and therefore, the necessary, deflationary policies, could cause a fall in growth.

Appreciating Yuan.

With a trade surplus as large as China's it makes sense for the Yuan to be revalued and allowed to find its natural value against a basket of other currencies. An appreciating Yuan would also help reduce inflationary pressures and moderate growth.

Unemployment.

Ironically, despite growth of 10%, Unemployment could be a major problem in China. This is due to several factors:

• The policy of privatisation is creating a lot of job losses in old inefficient state owned industries.
• The Agriculture sector is very poor, many farmers get very low incomes; sometimes it is so bad it could be characterised as disguised unemployment. If economic growth does slow down, it may be difficult to create enough jobs for those being lost in other inefficient sectors and therefore, unemployment will rise, creating severe social unrest.
  

• Chinese inflation at TIme magazine
• Forecast of Chinese Economy at Economist
• China Economic Forecasts

Forecasts for UK House Prices

In the short term, UK House prices are likely to stagnate and possibly even fall. There are concerns that many have taken out mortgages they may struggle to repay. This problem is exacerbated by the US subprime crisis which has caused the cost of general borrowing to increase. The fears over the subprime mortgage sector have caused British bank lenders to recently scrap their 125% mortgage deals.

Other concerns over British house prices is the fact that the ratio of house prices to income have increased. Basically house prices have risen faster than CPI inflation and wages. Therefore, there is an increase in the number of potential homebuyers who cannot afford to buy a house.

Combined with the difficulties of getting mortgage we are likely to see a fall in demand.

However, there are still some factors which may cause house prices to rise in the Long term.

Forecast for Rising House prices in Long Term

• Expanding population. Immigration from eastern europe is creating an inflow of young people looking for some where to live
• Expanding number of households. With more people living alone, there are more households. Therefore, demand for housing has increased faster than the population has increased
• Shortage of supply. In this post Housing Supply and demand, we can see how the government is failing to meet its targets of building enough houses. This shortfall in supply, could mean prices are kept artificially high, even though many cannot afford to buy them.

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