Our Opinion: 2014
China’s growth rate has dropped to the lowest since 1999. As a result, markets have fallen and commodities have taken a real hammering.
However, by international standards, the figures out of China are hardly terrible. In the fourth quarter of 2013, the economy grew by 7.7% – down from 7.8% in the third quarter. In most places, such growth would be considered miraculous. It only looks disappointing in the context of Chinese growth, that regularly exceeds 10% per year.
Slow-downs such as this are only to be expected in a country where the industrial revolution is still at a relatively early stage. Any fall in growth will certainly matter within China. If mass unemployment were to suddenly build in new cities, which have only ever known growth, political turmoil could follow – particularly since there is little in the way of a welfare system. But China will not stop exporting. If times get tougher in its internal economy, it will be more anxious to fill its order books overseas.
China is a massive exporter of consumer goods, accounting for over 13% of global GDP, according to the World Bank. But it is not a big consumer of the world’s goods, so a correction would have little impact on the rest of the world (other than Australia and part of Africa that ship the raw materials to China’s factories). Less than 1% of British or US GDP is made up of sales to China. Even in nearby Japan, the figure is only 2.4%. In Australia, it’s 5.8%.
Japan, perhaps, gives us a parallel. It crashed in 1990 and has still not recovered. Japan, like China, is an exporter, not an importer. So the crash has had limited effect elsewhere. The 1990s and first half of 2000s were very strong for the global economy, despite the second biggest global economy (Japan) being in permanent recession.
The markets will continue to be concerned about a China crash, but there’s no reason to suggest the real economy will slow. A lot of Chinese money may be pulled out of our capital markets and that will trouble some banks.
I believe that the risks of a crash in China are overplayed, although leaders will need to manage the economy carefully. Globally speaking, the long term effects will be negligible, whatever the outcome.