Goldman Cuts China, Asia Forecasts

MAY 24, 2011   THE WALL STREET JOURNAL

By GEOFFREY ROGOW And ENDA CURRAN

SYDNEY—Citing higher oil prices and supply-side constraints, Goldman Sachs Group Inc. on Tuesday cut its growth forecast for China and predicted inflation will accelerate in the world's second-largest economy.

In addition, the U.S. investment bank lowered its outlook for the Asia region, excluding Japan.

Goldman now forecasts China's gross domestic product will grow 9.4% this year and 9.2% in 2012, down from the previous forecasts of 10% and 9.5%, respectively. The bank raised its 2011 consumer price index forecast to 4.7% from 4.3%. It left 2012 unchanged at 3%.

"This is both a sharper and more extended slowdown than we had previously," said Goldman Sachs in a note dated Tuesday. Goldman's changes follow Monday's drop in the HSBC Chinese Purchasing Managers Index; the preliminary number for May came in at 51.1, down from a final 51.8 for April. Traders took the Goldman decision as further reason to sell the euro and Australian dollar, which has plummeted to start the week as European debt worries escalate and concerns develop about China's growth.

Goldman said China's gross domestic product will take a hit of 0.15 to 0.2 percentage point from costlier oil; the bank had earlier its forecast of the average price of brent crude this year between US$113.5 and US$130 a barrel, from its previous US$103 to US$110.

Still, the bank remains overweight on China within the Asia region. Within China's stock market, it said property and banks remain its top sectors.

Reflecting its weaker China outlook and a cut to its U.S. growth forecast two weeks ago, Goldman also pared its growth outlook for the wider region. For Asia excluding Japan, it now expects growth of 7.8% in 2011, down from its earlier forecast of 8.2%. Oil exporter Malaysia is the main exception to its cut-back expectations, Goldman said.

"In 2012, we are again roughly in line with consensus for the region but above consensus on China, Hong Kong and the Philippines and below consensus on India and Thailand," the Goldman note said.

The Australian dollar initially weakened as the Goldman note circulated. But after dropping as far as US$1.0482—from US$1.0656 to start the week—the currency quickly rebounded as dealers judged the downgrade as milder than initially expected.

"The Australian dollar bounced when Goldman Sachs said they were still overweight China," a Sydney-based dealer said.

Demand from China has been the largest factor in Australia's economic growth, which is projected by the country's central bank to exceed 4.5% next year.

China's need for iron ore and copper continues to grow, continuing a decade-long surge that helped Australia avoid a recession even during the global financial crisis. In the 2010 financial year, Australia exported A$46.55 billion worth of goods to China, more than nine times what it sold a decade ago.

Iron ore exports, up more than 25 times in the decade, make up more than half the total by value.