By Andrew Kenningham – Capital Economics
Although China’s growth has slowed sharply in recent years, we do not expect a “hard landing”. What’s more, even if we turn out to be wrong, some emerging economies would be hit hard by a slump in China, but the impact on advanced economies should generally be modest.
GDP growth in China has already slowed from double-digit levels before 2008 to around 5% this year, according to our in-house estimates. However, it has been relatively stable over the past six months, when a slump in its equity market has triggered falls in global asset prices. Looking ahead, we think China will regain some momentum, helped by the policy support now in the pipeline.
If China’s economy weakens much further, global growth would also slow. Growth of 2% rather than 6% in China would directly reduce world GDP growth by nearly one percentage point. Along with the knock-on effects elsewhere, global growth could fall from around 31/2% to just over 2% for a year or two. Industrial metal producers such as Australia and Chile could be hard hit. But the impact on the major advanced economies, including the US and euro-zone, would be much smaller.
Finally, there would be some offsetting advantages for the rest of the world from slower growth in China. Most importantly, although any further fall in commodity prices would hurt commodity producers, it should be a net positive for the world as a whole. Overall, therefore, while a slump in China would clearly dampen global growth, it would not be the catastrophe that many fear.