Sunday, October 11, 2015
China sneezes: Is the rest of the world catching a cold?
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

How worried should we be about the world economy and, by extension, Britain’s recovery? Is it time to batten down the hatches or is this just a pause for breath?

Should there be emergency action to boost global growth which, with the monetary levers already turned up to maximum can only mean a massive Keynesian fiscal boost, as advocated a few days ago by Larry Summers, the former US treasury secretary?

Concern over the global economy has been building for some time, most notably in worries over China and even America, where the majority on the Federal Reserve’s decision-making committee is keen to get on with raising interest rates but has so far been thwarted by global developments and disappointing US data.

That concern has been brought into sharper focus, however, by the latest forecast from the International Monetary Fund. The IMF’s forecast for world economic growth this year is just 3.1%; and given how much of the year has gone it is as much an assessment as a forecast.

Growth of 3.1% does not sound that bad. A growth rate in Britain of 3.1% would be very acceptable indeed. But for the world economy it is not good. The normal or “trend” growth rate of the world economy is 4%, or at least it was before the global financial crisis. The IMF’s definition of a world recession is when growth drops to 2% or below. So the current situation sees the world perched, perhaps precariously, halfway between a normal expansion and recession.

Not only that, but after three unspectacular years from 2012, in which the world economy has grown by 3.4%, 3.3% and 3.4% respectively, this year’s 3.1% is the worst since 2009, when there was no growth at all; the weakest in the post-war era. Growth this year is reckoned to be the same as in 2008, when the world was succumbing to the crisis and for the latter part of the year was clearly dragged down by it.

And, for once, it is easy to see where the problem lies. Advanced economies – North America, Western Europe, Japan and a few other parts of the world – are gradually picking up. This year’s 2% growth for advanced economies is nothing to write home about, and weaker than in the years leading up the crisis, where the average was close to 3%. But it is better than we have been used to. In 2012 and 2013, growth was barely above 1%, largely because of the eurozone’s woes.

Britain, incidentally, had its best year for growth last year, according to the IMF, which it puts at 3%, followed by a forecast/assessment of 2.5% this year and 2.2% for 2016. Having beaten the advanced countries’ average for a while, Britain’s growth next year will be exactly in line with it, according to the IMF. It sees advanced countries picking up from this year’s 2% to 2.2%.

Rather than the advanced economies, it is the emerging world where the problem lies. China is slowing and two of the four Brics (Brazil, Russia, India and China) are in recession this year and are expected to stay in recession next year. The IMF has Russia shrinking by 3.8% and 0.6% in 2015 and 2016 respectively, and Brazil by 3% and 1%.

For emerging economies as a whole, growth this year is put at 4%. That is the weakest since 2009, but that does not tell the full story. In 2009, emerging economies carried the world through the crisis. While advanced countries saw their economies dive – gross domestic product plunging by 3.4% (including a 2.8% fall in America and 4.3% in Britain) – emerging economies grew by 3.1%, including a remarkable recession-busting 9.6% expansion in China.

Growth then accelerated in emerging economies, to 7.5% in 2010. That, perhaps unsurprisingly, was the high watermark. Growth in the emerging world has slowed every year since, and this year’s 4% is barely more than half what was achieved four years ago.

Even that, however, does not tell the full story. If we look at the past decade and a half, emerging economy growth has always significantly exceeded growth in the advanced world. Sometimes emerging economy growth has been three times advanced-economy performance, sometimes more.

It was this that led me, and others, to conclude that we had moved into a new era for the world economy. In the 20th century two-thirds of global growth came from advanced economies, one-third, and often less, from the emerging world. In the 21st century, it seemed, those positions had been reversed, with emerging economies the new locomotives, responsible for two-thirds of the world’s growth.

Has that come to an end? Even the more muted growth in emerging economies this year, 4%, is twice the 2% expected for advanced countries. But that is the narrowest gap since 2000. Andy Haldane, the Bank of England’s chief economist, has talked of the emerging market crisis from 2015 onwards as part three of a trilogy that began with the “Anglo-Saxon” financial crisis of 2008-9 and transmuted into the eurozone crisis of 2011-12. Though the Bank’s minutes on Thursday were a little more guarded in their language, when interest rates were left unchanged at 0.5% for the 79th successive month, the emerging market slowdown is clearly a factor weighing on it.

Does it mean that we are going to return to the global economy of the 20th century, in which the West once again calls all the shots?

There is no doubt that emerging economies face challenges. In some ways they are victims of their earlier success, in that some of the international capital that flowed in in anticipation of strong growth forever is now flowing out again. This is similar to what gave us the Asian financial crisis of 1997-8. Investors seeking safer havens in the West have pushed up interest rates – bond yields – in emerging economies and this will affect growth.

In some respects, however, the story is a simple one. As long as China was growing very strongly, it produced a rising tide that lifted a lot of boats. Neither Brazil nor Russia can remotely be said to be well-run economies, and that applies to much of Africa, but as long as China was pushing up oil and commodity prices, growth in these commodity-rich economies was guaranteed.

The China slowdown has exposed underlying weaknesses. When China sneezes, many coountries catch a cold.

Some will fail to adjust but we should not be too gloomy. I am with Capital Economics, which headlines its new report on emerging economies: “One extreme to the other”. “Having been too optimistic on the outlook for the emerging world over much of the past five years, the consensus has now shifted too far in the other direction,” it says.

I’m also with the IMF. It thinks this year will be the low point for the emerging world, with growth picking up to 4.5% next year, building up to 5.3% by 2020, the latter alongside a slowdown in advanced economies. Something like normal recent service will eventually resume.

That, of course, is not guaranteed. And the one thing that looks odd in this context is an early rise in US interest rates. Even if the US economy were racing away, which it is not, there would seem to be a strong case for holding fire because of what is happening outside America. We shall see.