Commodities - MARCH 17, 2016

China’s global impact may be small

by Zoe Wolff

The current narrative states 2016 is off to a turbulent start in terms of the global economy. Oil prices are low, and a slowdown in China’s growth rate means bad news for everyone. But perhaps China’s economy will not be as big of a problem as everyone thinks, according to Standard & Poor’s.

In S&P’s recent webcast, “China and the Global Economy: S&P’s Latest Views on the Outlook for U.S., Europe and Emerging Markets,” economists Paul Sheard, Paul Gruenwald, Jean-Michel Six and Joaquin Cottani discussed how China’s slowing growth rate may not significantly affect the global economy.

China’s economic growth will continue to slow. Gruenwald predicted the growth rate will be about 6.3 percent for 2016, compared with 6.8 percent in 2015. Most of the narrative, said Gruenwald, focuses on the investment side of China’s GDP growth, which at its peak is generally 4 percent to 5 percent of growth and currently is about 1 percent. The focus, however, should be on the consumption side, which is holding up well and contributing more than 4 percent to China’s growth.

Gruenwald stated China is moving in the direction of slow but sustainable balanced growth, and there is no need to panic yet. Despite the seemingly significant problems in China, global growth has expanded by about 3.5 percent every year since mid-2009, and Sheard expected that to continue in 2016 and into 2017.

Major economies such as the United States, Japan and the euro zone are expecting positive growth this year. S&P predicts growth to be slightly above 2.5 percent in the United States and about 1.5 percent in the euro zone, both of which are increases from 2015.

Looking specifically at the United States, Sheard expects full employment by the end of 2016. In addition, monetary conditions have strengthened, as proven by the recent interest rate hike by the Federal Reserve. Sheard predicted three to four more rate hikes before the end of 2016. Though the United States does export to China, it is a moderate amount, and Sheard said S&P does not see this as a major factor in U.S. growth.

S&P’s economists also noted Europe is in the midst of a resilient upswing; Italy has pulled itself out of recession, and Spain has expanded growth to more than 3.5 percent in 2015. Europe’s economy is moving into 2016 with decent momentum, which is mainly consumer driven. Similar to the United States, Europe’s exports to China are fairly moderate. Germany, however, ships about 7 percent of its total exports to China, which is approximately 2.6 percent of GDP. Though trade with China is significant for Germany, a slowdown in the Chinese economy will have little effect on Europe as a whole.

Emerging markets, such as regions in Latin America, face more risk than the United States and Europe because of the amount of commodities exported to China. While Latin America may suffer in the short run, the S&P economists argued China is on the path to building sustainable growth, and Latin American trade will reap the benefits eventually.

Overall, China’s economic growth is slowing but moving in the right direction. China’s influence on the global economy has been blown out of proportion, according to S&P’s economists. The overall message: The United States and Europe have relatively stable economies that should expect growth this year, regardless of the situation in China.

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