China slowdown: a bumpy ride for the global economy but a crash unlikely

Strathclyde Business School student Samuel Baker reflects on the impact a slowdown in the Chinese economy could have on the global economy.

A slowdown in China has been a key driver of gyrating stock markets throughout the world economy. Some have argued that the poor market performance in 2016 is a bellwether for a financial crisis that will surpass the 2008 crisis.

According to CNBC pundits financial markets are good indicators of recessions. Some commentators have used this as a basis to assert that with the ongoing volatility in markets caused, mainly, by a slowdown in China and a fall in commodity prices, the world is set to experience an extreme economic crisis.

Although I agree that bear markets can be good indicators of recessions, I fundamentally disagree that current market performance is a sign of an impending recession.

My opinion is informed by a contrarian perspective of a key indicator, most frequently cited by pundits as a sign of impending doom; the Chinese slowdown.

Investors have been spooked by fears of an extreme economic slowdown in China and a devaluation of the Renminbi. The slowdown in the Chinese economy has decreased their demand for goods mainly raw materials which has led to low commodity prices. thus hitting the global economy. Fears that the Renminbi might devalue further have caused markets to react fearfully; a weaker Renminbi reduces the dollar value of the goods China can buy on international markets, thus creating more risk of a further slowdown in an already-sluggish world economy.

Despite fears of the fall out of a China slowdown across the rest of the world, China’s economic transition from an investment-based to a consumer-based economy was never likely to be straightforward. The question, therefore, should not be why the Chinese economy is slowing down but rather, whether China can successfully transition from an industry and investment-intensive economy to a services and consumption–based economy. Inevitably there will be disruption and most of it has been felt across the world already. If history is any indication, such transitions are never smooth.

Yes, the Chinese economy is slowing down, but is this a reason for a global economic crash? However precipitous it might be, it is unlikely that China is in for a hard landing and this should therefore calm those worried about an extreme global economic crisis. China’s economy grew by 6.9 percent in 2015 and although financial media headlines bewailed this as “the lowest growth rate in a quarter century,” they neglected to mention that this is, by far, the fastest GDP growth of any major economy except for India. In 2016, the Chinese economy is estimated to grow by 6.5 percent: a modest growth rate but one that does not suggest a hard landing. Albeit at a slower growth rate than we have become accustomed to, the Chinese economy continues to grow more than twice as fast as any developed economy.

Secondly, global economic growth is not as bad as feared. The OECD predicts that global growth is predicted to be between 3 percent and 3.3 percent for 2016 and 2017 respectively. According to Goldman Sachs the world economy will continue to experience a soft but positive recovery in 2016. Global growth at 3 percent is relatively modest but it will help to support the normalisation of the labour market. A low rate of actual unemployment to the equilibrium rate of unemployment (NAIRU) will help to boost both output and consumption thus offsetting the likelihood of the feared economic crisis.

It is likely that markets had initially overreacted to the expectation of a strong global recovery which pushed for an over-valuation of stocks. Now with global growth revised down to a modest recovery, markets have had to re-value to reflect this information thus causing the volatility we have experienced. As economist and investor Benjamin Graham said, markets are voting machines in the short term and weighing machines in the long term; what we are experiencing at the moment seems nothing more than just a voting process which will always tend to be volatile.

China matters in global economics and the fact that the second largest economy in the world is slowing will inevitably continue to create economic volatility around the world. Despite the slowdown however, it is unlikely that China is in for a hard landing and the fears of another 2008 crisis are therefore not justified. 2016 will most likely be a bumpy ride for most countries but not one that leads to a crash.