BOFIT Weekly Review 2016/41
China’s structural shift and economic slowdown profoundly impact global economy
The International Monetary Fund’s semi-annual World Economic Outlook (WEO) report was released last week. The IMF lowered slightly its forecast for global growth this year to 3.1 %, mainly on an unexpectedly weak performance of the US economy in the first half. Global economic growth is expected to accelerate next year to 3.4 %. While growth in developing economies is still expected to slow this year to 1.6 %, growth in emerging market economies, after years of continuous slowing, should accelerate to 4.2 %. Emerging market economies now account for about three-fourths of all global economic growth.
The WEO took special note of the impacts of China’s structural change and slowing growth on other countries. China is among the ten most important export markets for over 100 countries, so the slowing in Chinese growth and shifts in its growth model are strongly reflected in the global economy. Referring to earlier research, WEO reports, for example, that a 1 % negative shock to China’s final demand lowers world GDP by about 0.25 %.
Most impacts are transmitted via the foreign trade channel and depend to a large extent on the country’s export structure vis-à-vis China. As a rule, a change in the structure of Chinese demand benefits exporters of consumer goods and weakens the relative position of producers of investment goods. For energy and commodities producers, changes in Chinese demand are seen via changes in prices, but also China’s oversupply in some sectors causes price disturbances. The IMF said that the spillover effects to financial markets from changes in China, while limited at the moment, are growing. Turbulence in China’s financial markets has already increased volatility in international markets.
The slowdown in China’s growth and structural adjustments creates pressures at all levels and the road ahead will not be smooth. The IMF stressed that, managed properly, changes in China will put it on a more sustainable development path, a trend that is in the world’s interest.