Why is global growth slipping?

The OECD has become the latest international organisation to reflect on weaker global growth. Yesterday it trimmed its forecast for this year to 2.9 per cent, from 3 per cent, and to 3.3 per cent in 2016, from 3.6 per cent. It is concerned mostly about the weakness in world trade, which has hit emerging countries especially hard, and the economic slowdown in China.

Global forecasters don't like to acknowledge that the much bellowed tectonic shift in the world economy towards China and the emerging world has got sand in its gears at the moment. Yet, the tilt in global growth back towards the richer economies of the OECD, which is growing at about 2.2 per cent this year and perhaps a bit more in 2016, is unmistakable.

During the 2000s, the difference between emerging and developed economy growth widened from 2.5 per cent to over 6 per cent by the time the financial crisis erupted. Since then, though, the gap has been sliding relentlessly, and is likely to be less than 2 per cent in 2015. If we measure growth in terms of US dollars, which is important for emerging markets because of their strong reliance on exports, which feeds back into incomes and profits at home, growth has not only evaporated, but was actually 3 per cent lower in the first half of this year compared with the same period in 2014. We can say without equivocation that emerging markets have succumbed to a growth hiatus of uncertain duration. It definitely won't be over by Christmas this year or next.

This wasn't in the script. As though to amplify the point, Goldman Sachs, which devised the  BRIC acronym—standing for Brazil, Russia, India and China—in 2001, has just closed its BRICS investment fund, founded in 2006, after assets had fallen from a peak of $842m in 2010 to $98m, merging it with another emerging markets fund. It's safe to say, then, that the BRICS (the S stands for South Africa) era is done and dusted.

India is the only one of these countries holding its economic head above water, and Prime Minister Modi's visit to the UK later this week will doubtless be an opportunity for India to showcase its relative advantages, and its new focus on digital technology and clean energy, in spite of complex political and economic reform issues at home.

Brazil, though, is facing two years of recession for the first time since the 1930s. So is Russia, in its worst performance since the collapse of communism. South Africa is squeaking out about 1 per cent growth in its poorest showing since the early 1990s. And China, which is centre-stage in this story, is not collapsing as some in the financial commentariat have asserted, but things are not going well.

The OECD said in this week's economic forecast that China will grow by 6.8 per cent in 2015 and 6.5 per cent in 2016. This isn't a million miles from the IMF's September forecasts, which might make you wonder what all the fuss is about. If China is growing at this sort of rate, why did the US Federal Reserve cite China's problems in backing away from raising interest rates in September? To be fair, the US Fed has dropped its China angst, in public at least, following the strong employment report for October, released last Friday. And rightly so. But why did the Bank of England, referring also to China, leave us all wondering last week if it might not raise interest rates until 2017, if ever? The European Central Bank has also gone uber-doveish, largely based on China, in a prelude to a further expansion of its QE programme in December.

The answer is that the Chinese growth forecast numbers are probably inaccurate and in any case, not meaningful for the rest of the world. The new Chinese 13th Five Year Plan (2016-2020) is targeting 6.5 per cent annual growth, but there are reasonable grounds to believe that this not only over-estimates what's going on today, but also what is likely to be realised in the next few years. The numbers don't mean much outside China because GDP, per se, isn't what is driving change through the global economy. Instead, commodities, trade and finance do.

China's structural economic slowdown, and the slump in real estate construction investment especially, is already resulting in a marked downturn in the commodity-intensity of economic growth. Over-capacity isn't just a problem in real estate, but in manufacturing too. Even though one can imagine cutbacks in capacity by global commodity companies to eventually stabilise markets again, the China-centric commodity story is over.

Trade is important, in particular for countries that have high exposure to China. Here we think especially of Hong Kong, Korea, Taiwan, and Malaysia, some key countries in the Middle East and Africa such as Angola, South Africa, and the countries in the Persian Gulf, and of countries such as Brazil, Chile and Peru. And the effects on these individual countries also generate "neighborhood" effects as they spill over into their regions.

Last August, China shook the world momentarily when its equity market was in free-fall, and when it mysteriously devalued the Yuan by a small amount. Stability has retuned to both markets for now, but a larger problem looms in the form of the exposure of banks to Chinese borrowers. Since 2008, lending to China has gone up sixfold, and as European banks have retreated, Asian banks, especially in China, Hong Kong and Singapore, have filled the gap. For a while, it may be possible to evergreen, or roll, bad loans in China, but not forever. Sooner or later, credit growth will slow more significantly, deleveraging will begin, and banks will have to account for much bigger loses than are officially acknowledged.

The overall impact of these developments in China for the rest of the world is clearly problematic. But more so for emerging than for developed economies, more so for commodity than manufacturing emerging markets, and more so for western companies that have come to rely on China sales, for example in the luxury and auto sectors, than for the economies they are headquartered in.