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As argued by Gros (2015), the recent Chinese expansion fuelled largely by domestic investment (with gross fixed-capital formation at 46% of GDP in 2013) was unsustainable and doomed to taper off. The IMF (2015) had already factored in a persistent slowdown to around 6% annual growth in its 2015 forecasts, although the European Commission (2015) is slightly more optimistic. The latest market turmoil has made only a limited impact on the recent OECD’s September forecast for the world economy and, indeed, the OECD (2015) sees a slight improvement for the euro area in 2015. Against this background, one important question relates to the speed of adjustment of the Chinese economy towards a more sustainable path, including a rebalancing towards more consumer goods-driven growth, as well as the reaction in financial markets.
What if the slowdown turns out to be more abrupt? Commentators are concerned that current official growth figures are not accurate and significantly overstate current growth rates. Some argue that actual growth is running closer to 4% than 6%, and that there is a risk of a drop to 3% or even more.
What would be the short-run impact of a growth slowdown to, say, 3% rather than 6% per year on the European economy? [...]
Conclusions
Since slower Chinese growth goes hand-in-hand with lower commodity prices, the latter is likely to provide EU countries with a strong offset for lower Chinese export demand. As suggested by the arguments above, the wider EU implications look manageable. Furthermore, the burden of the slowdown is likely to fall on the EU’s broadest shoulders and, in fact, may even contribute to a rebalancing within Europe. Lower German exports to China will be felt throughout the EU, but only as a secondround effect in those countries heavily dependent on intermediate exports to Germany.
If China’s growth were to slow more abruptly than expected, the economic impact on EU countries may be larger and broader. In this case, one should also worry about how that would play out with domestic policy in China and abroad. The likely intervention by China’s central bank to manage the slowdown could lead to a weaker Renminbi and spill over into a further widening of the current account deficit vis-à-vis the US. Such a move has gone down badly with US domestic politics in the past and is unlikely to be received any differently in a presidential election year.