A worker stands on steel bars at a construction site in Beijing on Thursday.[Photo/Reuters]

Domestic demand will plug hole caused by decline in exports

BRUSSELS - China's economy in 2011 and 2012 will maintain a stable growth rate of 9.7 percent, lower than this year's estimated 10.5 percent, according to the Organization for Economic Cooperation and Development (OECD).

It said China's renewed buoyancy is projected to continue in 2011-2012, as rising domestic demand offsets a renewed slowdown in exports, stabilizing the current account surplus at around 5.5 percent of the economy.

China has already been listed as an enhanced engagement country of the OECD, which is considering accepting it as member. So far, a total of 33 industrialized economies belong to the organization.

In its latest World Economic Outlook, the OECD also said that acceleration in non-food prices is to be offset by an easing of food price inflation, resulting in the stabilization of inflation at slightly above 3 percent in China this year.

The OECD suggested the stability of the domestic economy would be enhanced if the exchange rate policy were more oriented to allowing an appreciation of the yuan against a basket of currencies.

At a news briefing in Paris on Thursday, Pier Carlo Padoan, chief economist of the OECD, said economic activity in member countries will gradually pick up steam over the coming two years, but that recovery will be uneven and unemployment will remain high.

The organization forecast world economic growth would slow to 4.2 percent in 2011 from 4.6 percent this year, before returning to a rate of 4.6 percent in 2012.

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"We see the recovery ongoing but at a somewhat slower pace," Padoan told Reuters in an interview.

With the financial sector returning to normal after the global slowdown, and households and businesses in a position to renew spending and investment, the main challenge facing governments today is moving from a policy-driven recovery toward self-sustained growth.

"As the stimulus is withdrawn, governments will have to provide a credible medium-term framework, to stabilize expectations and strengthen confidence, particularly for the private sector," said the OECD.

Meanwhile, OECD Secretary-General Angel Gurra said: "Enhanced confidence could result in a faster-than-projected recovery."

Gross domestic product (GDP) across OECD is projected to rise by 2.3 percent in 2011 and 2.8 percent in 2012.

In the United States, activity is projected to rise by 2.2 percent in 2011 and then by 3.1 percent in 2012.

Eurozone growth is forecast at 1.7 percent in 2011 and 2 percent in 2012, while in Japan, GDP is expected to expand by 1.7 percent in 2011 and by 1.3 percent in 2012.

Emerging markets are expected to grow at a quicker pace than OECD members, helping to lift global trade growth to more than 8 percent annually in 2011 and 2012.

But uneven growth within the OECD area, as well as between the OECD and emerging economies, will add to global imbalances, which are among the most significant threats to the recovery.

The OECD warns countries against taking unilateral action in response to exchange rate volatility, and says that international cooperation, notably within the G20 process, will be essential in warding off protectionism.

The report also highlights other downside risks that could derail the recovery, including the potential for renewed falls in real estate prices, most notably in the US and the United Kingdom, high sovereign debt in some countries and possible abrupt reversals in government bond yields.