It has long been said that “when America sneezes, the rest of the world catches a cold”; meaning that a downturn in the world’s largest economy will have a ripple effect on the fortunes of other economies around the globe. In a new twist on this old saying, the International Monetary Fund is suggesting that it may now be applicable to the world’s second largest economy too.
China has become the second largest economy in the world, accounting for approximately 12% of total, global trade (on this measure the USA represents 23% and the EU 17% - the EU is a bloc rather than a country, of course). China has enjoyed spectacular growth in recent years: in 1995, China accounted for just 2% of the global economy. It represents a major importer of many commodities and consequently, slowing economic activity in China can have a knock-on effect elsewhere. Weak demand from China has put negative pressure on commodity prices such as oil and copper which is good news for importers, but bad news for exporting nations.
The IMF thinks that the slowdown in the Chinese economy could dampen global growth, but anticipate that the 2015 figure will come in at 3.3% marginally below last year’s 3.4% figure. It anticipates that China’s economy will grow by 6.8% this year – a phenomenal level of growth when compared to other leading economies – easing from 7.4% last year. In comparison, the IMF expects US growth to come in at 2.5%, marginally better than last year’s 2.4% and that Eurozone growth will nearly double from 0.8% last year to 1.5% this year. The IMF is urging China to continue with its efforts to rebalance its economy to tap domestic demand, rather than rely on exports to the outside world.
The IMF is cautioning against any early rise in interest rates in the USA believing that this could dampen still weak economic growth. Most analysts, however, are expecting the Federal Reserve to start tightening its monetary policy in the autumn, possibly as soon as this month’s meeting.