Readers Question: If there is a significant slowdown in the rate of Chinese economic growth – how will it affect the UK and other global economies?
The Chinese economy has been growing very rapidly, and is now one of the biggest economies in the world. The size of the Chinese economy means it has a significant effect on global commodity prices and global trade. In 2013, China’s GDP was 12.5% of the world economy. A slowdown in the Chinese economy means a fall in the rate of economic growth. This could lead to lower export demand, cheaper commodity prices and a fall in economic confidence.
Lower export demand. The first impact of a slowdown in Chinese economic growth is that it will, ceteris paribus, reduce demand for UK exports. This could affect UK aggregate demand and lead to lower economic growth in the UK. T However, exports to China only make up a small percentage of UK export demand. As a component of total UK AD, exports to China are quite insignificant.
UK exports to China – Gov.UK. 2011 £12bn (UK GDP approx £2,000 bn)
Recently the chancellor George Osborne targeted UK exports to rise to £1 trillion by the end of the decade. This optimistic growth target was based largely on China’s expected growth. But, a Chinese slowdown will diminish prospect of rising exports in future.
Rebalancing away from Europe. Another factor is that economic growth in Europe is also weak. There is a need for the UK to rebalance exports away from Europe, the Chinese slowdown makes this more difficult. Also, with weak export demand to Europe, a fall in exports to China will reduce AD further.
Less Chinese students / tourism. One of the strengths of the UK economy is higher education. Chinese students pay a lot of money to study at college and universities. A slowdown in Chinese economy could lead to falling student numbers and a decline in service sector earnings.
Current account deficit. The UK already has a large trade deficit with China. (We import more goods and services than we export).
A slowdown in the Chinese economy is likely to increase this gap. The UK will continue to import cheap Chinese exports, but if we export less, the current account deficit will grow.
Global multipliers. Exports to China are relatively small, but if the Chinese economy slows down, we are likely to see knock on effects to other countries in Asia, and also Europe and the US. Therefore, the fall in exports could be bigger than just the slowdown in China. If the Chinese slowdown has an impact on global growth, then the effect will be larger for the UK.
Confidence. Although, exports to China are relatively small percentage of UK AD, the Chinese slowdown may have an adverse impact on UK consumer and business confidence. Bad news from China may cause firms to delay investment decisions, leading to lower economic growth.
Commodity prices. China’s growth has led to rising demand for commodities, such as oil and metals. A slowdown in Chinese growth will lead to lower demand and falling prices. Already many commodity prices have fallen, due to over-supply. A Chinese slowdown will lead to further falls in commodity prices.
For some commodity producing countries, such as Australia and Canada, this is bad news. It will lead to lower export revenue and lower growth. The UK is a net importer of commodities, so will generally benefit from lower commodity prices, because cheaper oil and commodities will effectively increase discretionary income.
The UK already has low inflation (recently CPI inflation was negative for second month). A slowdown could lead to price cuts from Chinese manufacturers as they try to sell excess goods. The combination of cheaper price of Chinese goods and lower commodity prices will help reduce UK inflation further. It could even cause a period of deflation. The lower inflation rate may impact on UK monetary policy and delay the expected rise in interest rates.
Global growth, especially in Europe, is fragile. Inflation is well below target and the economic recovery is uncertain. A slowdown in the Chinese economy could derail this tentative recovery and make it harder to achieve the UK trend rate of growth. On the positive side, a Chinese slowdown will help reduce price of commodities. But, given inflation is already negative, this is of limited help. In the long-term, a strong Chinese economy has the potential to give a strong growth in exports.