Trends in the Economy

The chinese dragon losing its fire

China’s economy grew 6.9% in 2015, the slowest pace in 25 years, slipping below the 7% mark  sparking concerns both at home and abroad over the continued slowdown in the world’s second largest economy. The growth rate moderated to 6.8% for the fourth quarter, the lowest quarterly rate since the global financial crisis in 2009.

The weak GDP data has strengthened market expectations that the government will unveil more stimulus moves. China’s central bank did reveal it would inject more than 600 bn yuan ($91.22 bn) into the banking system.

Exports from China have declined, and exports to China must battle against the depreciating yuan. Depreciation of the Yuan sparked fears that other countries in the region would also start to devalue their currencies to compete with China on exports and that rattled the global markets. China’s slowdown has depressed global commodity prices and adversely affecting big exporting countries.

In Europe, the Middle East and Africa (EMEA) in particular, there are three ways in which a China slowdown will substantially impact regional economic growth:

  • A fading export market: China’s boom has provided a growing, reliable export destination for many European companies, but a slowdown will suppress top-line growth for industrial, technology, and consumer firms alike. The commodity-led economies of the Middle East and Africa could be harder hit. Chinese demand has filled the void left by Europe’s stagnant consumption. Reduced commodity exports would cut governments’ ability to spend, weakening an important growth driver for many of the world’s most dynamic frontier markets.
  • A pullback in foreign direct investment: One-quarter of all FDI into Sub-Saharan Africa since 2006 has come from China. However, recipients of Chinese FDI are less likely to be severely affected, because Chinese companies are more likely to focus on growth internationally if their domestic market weakens.
  • A trigger of financial-market instability: Depending on whether a Chinese slowdown surprises global financial markets, financial volatility would result in a flow of capital back to developed markets, causing significant currency volatility in EMEA and impacting the prices of goods imported from developed markets, hurting consumers across the region.

 BEYOND CHINA

The concern about the economic outlook is not just over China. The IMF’s new forecast downgrades the outlook for the emerging and developing countries.

The International Monetary Fund (IMF) cut its forecast on global economic growth in 2016 to 3.4% from 3.6% projected in October 2015. The projection is, however, higher than last year’s expansion of 3.1%. This is the third time in six months that the multilateral agency has cut its forecast for global GDP growth for 2016. The IMF also lowered its forecast for global GDP growth in 2017 to 3.6% from 3.8% projected earlier. The revisions are primarily on account of lower-than-expected growth in the emerging and developing countries.

These revisions reflect to a substantial degree, but not exclusively, a weaker pickup in emerging economies than was forecast in October 2015.  The revisions are largely accounted for by Brazil, where the recession is caused by political uncertainty. West Asia, where prospects are hurt by lower oil prices, and the US, where growth momentum is now expected to hold steady rather than gather steam.

For 2016 and 2017, the IMF lowered the forecast for growth in the US economy to 2.6% from 2.8% predicted earlier, while the same for the euro area was pegged at 1.7% for 2016, as against its earlier estimate of 1.6%. The growth estimate for 2017 is 1.7%.

The multilateral agency cut its forecast for emerging and developing countries in 2016 and 2017 by 0.2 percentage points each to 4.3% and 4.7%, respectively, and advanced countries by 0.1 percentage point each to 2.1%. Among large economies, Brazil and Russia are likely to be the worst performing in 2016 growing at (-) 3.5% and (-)1%, respectively.

Risks to the global outlook remain tilted to the downside and relate to slowdown in emerging market economies, China’s rebalancing, lower commodity prices, and the gradual exit from extraordinarily accommodative monetary conditions in the US. “If these key challenges are not successfully managed, global growth could be derailed,” IMF warned.

The IMF kept its growth forecast for India and China unchanged at 7.3% and 6.3% respectively from October 2015. The growth in the Indian economy is projected to pick up to 7.5% in FY17 from a likely 7.3% in FY16, while growth in China is projected to slow down to 6.3% in 2016 from 6.6% last year.

 (Image source)

Arihant Team
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