The Forecast Issue
Everyone was confident that the global economy was still fattening up– until the faltering Chinese stock market slimmed down the size of the menu.
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China has been the roaring dragon of economic success over the last few decades. Its economy has gone through an industrial revolution of its own. Lower manufacturing costs helped the world to prosper, keeping prices low which in turn allowed interest rates to stay low and put money in everyone’s pockets. Even the once poor Chinese are now able to splash their new found wealth on our European exports, helping to support the western economies.
But China’s economic growth rate has fallen and the realisation that it may no longer be the power house of global growth has caused a degree of panic across the world. That panic is based on the fear that if Chinas economic fire burns less brightly, the rest of the world’s economies will be a degree or few cooler too. As the chart shows, China has been responsible for supporting the rate of global economic growth for many years.
But what is of bigger concern to the developed countries like the UK is, if Chinese economy is no longer able to drive global growth, who will replace it? With Europe – and the UK – still in fragile economic states there are big risks. With slower global growth, managing the deficit will become an even longer game, and so will the path out of the dark world of austerity.
But this is the gloomiest view. Even if China’s economy is slowing, it is still growing quickly – about five per cent a year after almost 30 years of 10 per cent growth. And the Chinese authorities have a lot of room for manoeuvre to stimulate its economy. Interest rates can be cut again and the exchange rate can be adjusted too. Each would bolster growth and help sustain economy.
So even if the recent wobbles mean that there are fewer economic spring rolls for the world to feast on, the more substantial crispy duck will still be there to enjoy.
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