The impact of the Chinese economic slowdown on the world economy and commodity prices
Data on the Chinese economic slowdown are causing concern about its potential extent and its global consequences. This box aims to outline the possible impact of the Chinese economic slowdown on the world economy. A permanent negative shock to Chinese GDP of 1% was simulated using the GVAR model.1 The results reveal that most advanced countries react very similarly to the shock, with an elasticity in the range of 0.1% and 0.2% (see Chart 1). For example, the estimated long-term elasticity of euro area economic activity to a shock to Chinese GDP is 0.2.2
Chart 1 (BOX) Impact of a 1% negative shock to Chinese GDP on advanced economies
A Chinese economic slowdown has a similar effect on developed economies in the long run, with an elasticity in the range of 0.1%–0.2%
Note: Quarters are shown on the x-axis.
The impacts of the same 1% shock on output in other regions are shown in Chart 2. The strongest reaction is naturally visible for China’s trading partners in Southeast Asia (-0.4% in the long run), in particular South Korea and Indonesia. By contrast, the smallest reaction, aside from the large advanced economies discussed above, is observed for European countries outside the euro area (Sweden, Switzerland, etc.).
Chart 2 (BOX) Impact of a 1% negative shock to Chinese GDP on regions of the world
Other SE Asian countries are naturally hit hardest by a shock to the Chinese economy; the impact on the Central European region is rather stronger than that on large developed economies
Note: Quarters are shown on the x-axis. Regions are weighted aggregates with weights based on GDP in PPP. Large developed economies = euro area, USA, Japan and UK; Rest of SE Asia = Indonesia, South Korea, etc.; CEE = Poland, Hungary, Czech Republic, Slovakia; Latin America = Brazil, Argentina, etc.; Rest of Europe = Sweden, Switzerland, etc.; Other countries = Russia, South Africa, India, etc.
The results for Central and Eastern Europe (CEE) point to a slightly stronger reaction to a shock to China’s output (-0.27% given a shock of 1%) compared to the euro area, mainly because CEE economies are more open. On average, the reaction is comparable to that in the other countries category (where India is affected most strongly). Latin American economies are hit harder by the shock than Central European countries in the short run, but the subsequent long-run impact is similar.
A weakening of Chinese economic growth should also give rise to lower commodity prices (see Chart 3). According to the model estimates, the simulated shock causes oil prices to fall by almost 3%, while the long-run decline in metal prices is almost 1%.
Chart 3 (BOX) Impact of a 1% negative shock to Chinese GDP on commodity prices
The simulated shock causes oil prices to fall by almost 3%, while the long-run decline in metal prices is almost 1%
Note: Quarters are shown on the x-axis. The metal price is proxied by the IMF metals index.
Overall, the simulations suggest that the expected Chinese economic slowdown will have an adverse effect on global economic growth, the extent of which will depend on the intensity of the Chinese slowdown and on the specific trade links between economies. The impact on advanced countries is likely to be smaller than that on emerging countries. The blow will be softened by a decrease in world commodity prices, which represents a favourable supply-side shock for commodity importers.
1 The GVAR model is used as an alternative to the NiGEM global macroeconomic model. It works with quarterly data for 30 major world economies in 1995–2014. For each country, it contains data on inflation, nominal short-term and long-term interest rates, real GDP, the stock index, loans and the exchange rate against the US dollar. The model also includes prices of oil and metals. More details on the GVAR model are available, for example, in Global Economic Outlook 1/2015, Chudik and Pesaran (2014) and Feldkircher and Korhonen (2012).
2 This means that, for example, a sharp decrease in the growth rate of the Chinese economy of 4 percentage points (from 7% to 3%) would cause the euro area to slow by 0.8 percentage point (from 2% to 1.2%).