Deutsche Bank: China'S Impact On European Recession

Deutsche Bank's latest research report downgrades the GDP growth forecast for the euro area in 2009, and its foreign exchange strategist expects that the euro will fall to 1.35 against the US dollar at the end of 2009.

The bank said that as Europe's largest export area in China, its economic downturn will bring China's second economic blow after the US. Its influence on China's electronics and textile and garment industry is more serious. China will respond to many fiscal stimulus measures such as tax cuts and so on.

Deutsche Bank expects European GDP growth to decline by 1.1%, and the euro will depreciate by 10% next year. China's exports to Europe may decline from 26% this year to zero growth.

Deutsche also believes that the economic downturn in the euro zone is the biggest blow to China's exports of electronics and textiles and clothing, because the two industries account for 2/3 of China's exports to the euro; if the GDP growth in the euro area is down by 1%, China's electronic exports to Europe will decline by 15%, while textile and clothing exports to Europe will decline by 5%.

The bank believes that the Chinese government will stimulate domestic demand to cope with the impact of external weakness, and the next step is to introduce measures to stimulate the economy or allocate 1% of the total fiscal revenue of GDP to stimulate economic growth.