Global Economy 2016: China’s Slowdown Factor

The International Monetary Fund (IMF) forecasts that next year the global economy will grow by 3.6%, up from 3.1% this year. According to the Organisation for Economic Co-operation and Development (OECD), global GDP should increase from 2.9% in 2015 to 3.3% in 2016. The Conference Board has a more cautious forecast: it has estimated the growth rate at 2.5% this year and 2.8% next year. Economists agree that one of the most important factors affecting the global economy in 2016 will be China’s economic slowdown. However, their evaluations of its extent differ.

The IMF predicts that next year China’s economy will slow to 6.3%, down from 6.8% this year. Peter Coy, Economics Editor at Bloomberg Businessweek, has commented that such economic growth is tolerable but below expectations of Chinese authorities. He has also observed some difficulties in increasing domestic consumption to boost the economy. The OECD warns that government attempts will not be effective if there is too much ‘debt-financed spending on construction’. In its opinion, Chinese consumers need more support in the form of social safety nets and welfare spending. However, it is very likely that these measures will not be sufficient because of the complexity of the reasons behind China’s slowdown: in short, it is a mix of decreased manufacturing activity and export demand plus a decline in the housing and steel sectors plus debts.

The OECD estimates that China’s growth rate will be gradually decreasing: from 7.4% in 2014 to 6.7% this year and 6.5% next year. William Horobin, an economics journalist at The Wall Street Journal, thinks that these figures indicate a lack of confidence in China’s economy, which can have serious negative consequences for its financial markets. “Uncertainty about China growth is now the main swing factor in markets,” explains Tim Condon, Chief Economist at ING Asia.

Willem Buiter, Chief Global Economist at Citigroup, warns that if China’s slowdown intensifies, other emerging markets will fall into deep recession. The situation of rich countries is much better: they are not that much dependent on exports to China, so their economic growth will slow, but will not stop. The OECD argues that if Chinese domestic demand is too weak, it will hit financial market confidence and many economies. In its opinion, advanced economies will not be an exception either.

John Simons, Enterprise Editor at the International Business Times, believes that China’s slowdown will not obstruct the growth of the global economy over the next 2 years. He bases his opinion on the OECD’s latest report which sees the recent changes in China’s monetary and financial policy as important economic stimulus measures. Simons explains that the policy review should “[…] support the domestic stock market, lower lending rates and boost business activity through infrastructure investments”.

The Fitch Ratings agency presents a China ‘shock’ growth scenario. In its recent report, it warns that a sharp fall of China’s GDP to 2.3% between 2016 and 2018 would severely hit global trade, and would have a knock-on effect on emerging markets and global corporates. One of the main negative outcomes would be a prolonged period of lower short-term interest rates and commodity prices. This in turn would put pressure on oil prices. The domino effect would continue: China’s slowdown would harm the credit profiles of many companies around the world, especially those dependent on oil, gas, steel and mining. Decreased Chinese demand would increase credit pressure on the global technology, heavy manufacturing and automotive sectors. Fitch Ratings concludes that if China’s economy faced extreme deceleration, it would have a direct negative impact on the global economy, corporate credit and monetary policy.

References:  [1] Bill Conerly, Forbes / [2] Heather Long, CNNMoney / [3] Peter Coy, Bloomberg / [4] William Horobin, MarketWatch / [5] EZTrader / [6] Gui Qing Koh, Reuters / [7] Kyodo, The Japan Times / [8] John Simons, International Business Times / [9] Holly Ellyatt,