Growth is picking up and inflation remains low. Domestic demand has led the turnaround, aided by a small fiscal stimulus and rapid credit expansion that did not slacken until June 2013. By past standards though, the recovery is subdued, reflecting a marked slowing in potential growth in the past few years. The momentum of domestic demand is projected to help external rebalancing resume in 2014 but little change has occurred so far in the structure of domestic demand. Overall excess capacity is limited and shrinking.With a fairly neutral macroeconomic policy stance, growth is projected to peak in 2014 and then edge down to around 7.5% in 2015.
Money and credit growth need to be reined in. The key one-year deposit rate should gradually be lifted, so that real rates come back closer to their long-term average. Transparent measures should be taken to ensure the resolution of local government borrowing platforms unable to meet interest payments without fiscal subsidies. The government should increase the levels of some social benefits and move towards its target of lowering out-of-pocket expenditure on health to 30% of total costs.With the economy recovering, there is now a favourable window to push forward with structural reform, in particular financial liberalisation, encouraging labour mobility and tax reform.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.