The past is not always a good guide to the futureby George Magnus / November 10, 2014 / Leave a comment
In the wake of a sustained slowdown in China’s economic growth, from about 11 per cent between 2006-11 to a little over 7 per cent in 2014, some people are wondering whether China could stall. That would hurt economic and social stability in China, and would add to recession and deflation risks in the world economy. But why would the world’s largest economy stall?
The empirical evidence doesn’t support the idea that economies get blown off-course simply because they are growing slowly or slowing down before they succumb to a sudden stop. Research conducted by the Federal Reserve Board and the Bank for International Settlements in the last few years, for example, found scant evidence of any low-growth threshold that preceded a stall, and concluded that some sort of shock was needed to produce a “knife-edge” moment.
With China slowing down to 7 per cent, it ought to be nowhere near stall speed, but if we look at the sudden growth stops that struck emerging markets in the 1990s, for example in Thailand, South Korea, Russia, Mexico and Brazil, they showed no evidence of decelerating growth before they crashed. On the contrary, in these and some other cases, growth was actually elevated or accelerating before they did. Their circumstances at the time were different from China’s today in many ways, but this doesn’t mean that China’s growth is assured.