China's GDP (gross domestic product) growth is set to downshift over the next five years, with the slow-down in policy stimulus to hit the Australian economy hard.
According to Pimco global co-head of emerging markets portfolio management, Ramin Toloui, China's GDP growthwill fall to an average of 6 to 7.5 per cent annually over the next five years compared to more than 9 per cent on average for the past five as net exports and investments reach their limit.
"Prospects for export-led growth are inhibited by China's large size in a global marketplace that remains deficient in aggregate demand due to high indebtedness in the developed world," he said.
Investment cannot play its traditional role in driving growth because it has already risen to almost 50 per cent of GDP, up from 35 per cent in 2000 and from 42 per cent in 2007 before the global financial crisis, Toloui added.
Japan is currently pursuing what head of portfolio management Japan Tomoya Masanao has described as hyperactive monetary policy in a move to end ten years of deflation.
Masanao said that the sustainability of initial gains in asset markets will depend on the implementation of structural policy reforms.
As the intensity of Chinese policy stimulus subsides and domestic growth outside the mining sector remains subdued, Pimco said it expects the so-called "new normal" to hit the Australian economy.
"This economic backdrop implies a new neutral level for policy rates, which we believes should be lowered from 5.5 per cent to about 3 per cent, which takes into account higher end-borrowing rates, an elevated Australian dollar and lower potential growth rates," Pimco head of portfolio management Australian Robert Mead said.
