Has the world economy’s main engine of growth suddenly become its biggest threat?by Anatole Kaletsky / October 15, 2015 / Leave a comment
Published in November 2015 issue of Prospect Magazine
The Conservative government’s latest panacea for sluggish economic growth and possible isolation from Europe has been the promise of surging trade with China. But just as George Osborne was kow-towing to Chinese politicians and businessmen on his summer sales trip, the country plunged into financial turmoil which raised an alarming question: has the world economy’s main engine of growth since the 2008 crisis, changed suddenly into the biggest threat to global recovery?
A sensible answer requires us to distinguish between three separate blows that hit China over the summer: economic weakness, financial turmoil, and government blunders in response to these shocks. The true risk from China stems not from any one of these problems, but from the interaction between all three: weak economic data has led to turmoil in financial markets, which has triggered clumsy political reactions, which in turn have provoked additional financial panic, which may now lead to further economic setbacks, giving the vicious circle another twist. It is this self-reinforcing feedback loop that now threatens the global economy.
Were it not for the vicious circle between economic data, financial panic and policy blunders, the Chinese slowdown would in itself be neither surprising nor alarming. China’s growth rate has been declining steadily from a peak of 11 per cent in 2010 to between 6 and 7 per cent this year. This slowdown is not surprising because double-digit growth was bound to become unsustainable as China graduated from extreme poverty and technological backwardness, with insatiable requirements for housing and government-led infrastructure investment, to become a middle-income country whose growth must be powered by consumer spending and private enterprise.