World’s growth is still made in China

Stephen S. Roach

Despite all the hand-wringing over the vaunted China slowdown, the Chinese economy remains the single largest contributor to world GDP growth. For a global economy limping along at stall speed – and most likely unable to withstand a significant shock without toppling into renewed recession – that contribution is all the more important.

A few numbers bear this out. If Chinese GDP growth reaches 6.7 per cent in 2016 – in line with the government’s official target and only slightly above the International Monetary Fund’s latest prediction (6.6 per cent – China would account for 1.2 percentage points of world GDP growth. With the IMF currently expecting only 3.1 per cent global growth this year, China would contribute nearly 39 per cent of the total.

That share dwarfs the contribution of other major economies. For example, while the United States is widely praised for a solid recovery, its GDP is expected to grow by just 2.2 per cent in 2016 – enough to contribute just 0.3 percentage points to overall world GDP growth, or only about one-fourth of the contribution made by China.

A sclerotic European economy is expected to add a mere 0.2 percentage points to world growth, and Japan not even 0.1 percentage point. China’s contribution to global growth is, in fact, 50 per cent larger than the combined 0.8-percentagepoint contribution likely to be made by all of the so-called advanced economies.

Moreover, no developing economy comes close to China’s contribution to global growth. India’s GDP is expected to grow by 7.4 per cent this year, or 0.8 percentage points faster than China. But the Chinese economy accounts for fully 18 per cent of world output (measured on a purchasingpower-parity basis) – more than double India’s 7.6 per cent share. That means India’s contribution to global GDP growth is likely to be just 0.6 percentage points this year – only half the 1.2-percentage-point boost expected from China.

More broadly, China is expected to account for fully 73 per cent of total growth of the so-called BRICS grouping of large developing economies. The gains in India (7.4 per cent) and South Africa (0.1 per cent) are offset by ongoing recessions in Russia (-1.2 per cent) and Brazil (-3.3 per cent). Excluding China, BRICS GDP growth is expected to be an anemic 3.2 per cent in 2016.

So, no matter how you slice it, China remains the world’s major growth engine. Yes, the Chinese economy has slowed significantly from the 10 per cent average annual growth recorded during the 1980-2011 period.

But even after transitioning from the “old normal” to what the Chinese leadership has dubbed the “new normal,” global economic growth remains heavily dependent on China.

There are three key implications of a persistent China-centric global growth dynamic.

First, and most obvious, continued deceleration of Chinese growth would have a much greater impact on an otherwise weak global economy than would be the case if the world were growing at something closer to its longer-term trend of 3.6 per cent. Excluding China, world GDP growth would be about 1.9 per cent in 2016 – well below the 2.5 per cent threshold commonly associated with global recessions.

The second implication, related to the first, is that the widely feared economic “hard landing” for China would have a devastating global impact. Every one-percentage-point decline in Chinese GDP growth knocks close to 0.2 percentage points directly off world GDP; including the spillover effects of foreign trade, the total global growth impact would be around 0.3 percentage points. Defining a Chinese hard landing as a halving of the current 6.7 per cent growth rate, the combined direct and indirect effects of such an outcome would consequently knock about one percentage point off overall global growth. In such a scenario, there is no way the world could avoid another full-blown recession.

Finally (and more likely in my view), there are the global impacts of a successful rebalancing of the Chinese economy.

The world stands to benefit greatly if the components of China’s GDP continue to shift from manufacturing-led exports and investment to services and household consumption. Under those circumstances, Chinese domestic demand has the potential to become an increasingly important source of export-led growth for China’s major trading partners – provided, of course, that other countries are granted free and open access to rapidly expanding Chinese markets. A successful Chinese rebalancing scenario