Slower Growth and Vulnerability to Recession: Updating China's Global Impact
38 Pages Posted: 12 Aug 2015 Last revised: 13 Aug 2015
Date Written: August 1, 2015
Central to the global impacts of China’s emergence has been its structural imbalance (its excess product supply and excess saving), but this has diminished considerably in the transition years since 2010. These imbalances are now reversed as its consumption expands faster than its GDP and so the global implications are qualitatively different. Moreover, higher income, slower growth, and therefore increasing similarity with the advanced economies, implies that consumer and business confidence are now more central to performance, rendering recession possible, and more likely as the growth slowdown raises the intensity of the domestic spotlight on political performance. The international effects of the transition and a possible recession are here quantified using a global macro model with national portfolio rebalancing. The transition to consumption-led growth is shown to foster employment abroad, particularly in the US, while a major Chinese recession is shown to be damaging to the advanced economies and particularly to the US, the more so if China’s policy response is expansionary and includes floating the RMB.
Keywords: China, imbalances, saving, monetary policy, spill-overs, recession
JEL Classification: F42, F43, F47
Suggested Citation: Suggested Citation