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China's economic struggles are of particular concern to Europe: Nowotny

Monday, February 1, 2016 - 18:49
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The global economy remains on a moderate recovery track but China's slowdown is of particular concern as it raises the risk of crisis returning to developed nations, European Central Bank policymaker Ewald Nowotny said on Monday.

[BUDAPEST] The global economy remains on a moderate recovery track but China's slowdown is of particular concern as it raises the risk of crisis returning to developed nations, European Central Bank policymaker Ewald Nowotny said on Monday.

China's growth, though seemingly still rapid, is "meagre"compared to its social and demographic challenges, and its transformation will hurt its trading partners in the short term, said Nowotny, who is also the head of the Austrian central bank.

"The most urgent issue here is the financial volatility and economic weakness in various emerging market economies," Nowotny told a conference in Budapest. "Recent developments in China - since last year, world's largest economy in terms of GDP based on purchasing power parity - are of particular concern." The eurozone has struggled with weak growth and ultra-low inflation for years and its problems have been exacerbated by Chinese growth slowing to its lowest level in 25 years.

The ECB eased policy with a rate cut and an expansion of its asset purchase programme in December and signalled last month it may have to ease policy further in March.

Nowotny said Europe is playing a role in aggravating China's difficulties as the 19-nation euro area is also failing to do its part to foster global growth.

"In other words, the emerging markets now bring the crisis back to us - and at the same time remind us of the interdependence in the global economy," Nowotny added. "We should not be astonished about dampened global demand and deflationary tendencies if the euro area posts a current account surplus way above 3 per cent of GDP." Although household consumption has been showing tentative signs of recovery, corporate borrowing and investment remain low by historic standards.

High debt ratios and a large stock of bad loans spread across eurozone banks will continue to hold back economic growth for years as potential growth is seen below 1 per cent, well below historic norms.

REUTERS