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.
For the first time, the International Monetary Fund is predicting that China will slow over the medium-term, to 6.3 per cent by 2019. I would go further. The serial downgrades to China’s growth forecasts since 2011 are likely to continue for the foreseeable future and I expect growth to fall to about 4 per cent–– over the next several years. In and of itself, this need not be a disaster, but if it happened quickly, say in 2015-16, it would constitute precisely the kind of stall that would send strong shockwaves around the world.
China’s spectacular economic ascent over the last 10-15 years has been unprecedented. The past, though, is not necessarily a good guide to the future. No country has been able to sustain much more than a decade of double-digit growth. The extraordinarily benign and rapid globalisation of trade, finance and investment, on which China was able to piggy-back, is over. In some respects, globalisation itself has stalled, if not gone into reverse, and western consumer markets, in particular, have become much more sober. Moreover, the speed of China’s leap up the global size league has been achieved on the back of unrepeatable accomplishments. Some things you can only do once, for example joining the World Trade Organisation; the higher educational attainment from enrolling most children in secondary schools; the productivity growth from shifting labour from rural activities to urban manufacturing; and the efficiencies from building essential infrastructure.