BEIJING The OECD cut its growth forecast for China's economy on Tuesday, citing a still-unresolved euro zone crisis that could mute demand for Chinese exports for months to come.
Although the world's No. 2 economy is snapping out of its worst sequence of slowing growth in three years, and rising property and infrastructure investment are pointing to a rebound expected to last to 2014, the OECD cautioned that exports would remain a weak spot.
Underscoring the risks to growth, the OECD lowered its growth forecast for China to 8.5 percent next year, down from a 9.3 percent prediction made in May.
But that is still markedly higher than market estimates of 7.8 percent in the consensus Reuters poll taken last month in the wake of third-quarter GDP data.
The Chinese economy should grow 7.5 percent this year, the Paris-based group said in its latest report on the global economic outlook, with growth cresting at 8.9 percent in 2014.
"The economy will still face external headwinds," the OECD said. "By past standards, export growth is set to remain subdued."
Growth in exports should not exceed 9 percent over the next two years, the group said, a sharp slowdown from the past decade when annual growth averaged around 22 percent.
If the crisis in the euro zone - the biggest buyer of Chinese exports - worsens, China's gross domestic product growth would likely slip 0.6 percentage points in 2013, and 1.3 percentage points in 2014, the OECD said.
It said the scenario it designed for a worsening euro zone crisis assumes a 40 percent drop in stock market prices, and 300-basis-point rise in long-term government bond yields in euro zone nations under market pressure over a period of two years.
"The OECD as a whole would move into recession," said the report from the policy think-tank to the world's richest countries and its most influential emerging economies.
"China and other emerging market economies would not be immune from this shock."
As it is, China's jobless rate remains high, especially in urban areas, the OECD said, with a "rapidly increasing number of college graduates struggling to find jobs".
Rising unemployment is a headache for China's Communist Party, which relies on healthy economic growth, rising wealth and steady job creation to legitimize its one-party rule.
China's official unemployment rate has hovered around 4.1-4.3 percent on average for years, even during the 2008/09 financial crisis, and is widely regarded as unreliable by analysts.
Still, the OECD noted that China has scope to further loosen monetary and fiscal policies if necessary to boost growth.
China twice cut interest rates twice in the space of four weeks earlier this year, reducing one-year borrowing rates to 6 percent, though that leaves them way above near-zero rates in major developed nations.
The country's fiscal deficit is also projected to stand at a healthy 2 percent this year and 2.2 percent in 2013, well below an OECD average of 4.6 percent for 2013.
For now, the fast-tracking of infrastructure spending by Beijing and higher public housing investment is putting a floor beneath China's economic growth, the group said, without giving any policy recommendations.
Chinese demand for housing is also starting to improve again, it said, and banks have started lowering mortgage rates for first-time buyers, further boosting sentiment.
This, combined with rising wages, supported retail sales in the first nine months of the year, the OECD said.
"For the first time in about a decade, consumption is set to contribute more to growth this year than capital formation."
(Reporting by Koh Gui Qing; Editing by Kim Coghill)