October 26, 2016

World Economy is close to a recession at 3.1% projected growth when 2.5% GDP growth or less is defined as world recession

Stephen S. Roach, a faculty member at Yale University and a former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.

According to the International Monetary Fund – the official arbiter of global economic metrics – the Chinese economy accounts for 17.3 per cent of world GDP (measured on a purchasing-power-parity basis). A 6.7 per cent increase in Chinese real GDP thus translates into about 1.2 percentage points of world growth. Absent China, that contribution would need to be subtracted from the IMF's downwardly revised 3.1 per cent estimate for world GDP growth in 2016, dragging it down to 1.9 per cent – well below the 2.5 per cent threshold commonly associated with global recessions.

The IMF research suggests that China's global spillovers would add about another 25 per cent to the direct effects of China's growth shortfall. That means that if Chinese economic growth vanished into thin air, in accordance with our thought experiment, the sum of the direct effects (1.2 percentage points of global growth) and indirect spillovers (roughly another 0.3 percentage points) would essentially halve the current baseline estimate of 2016 global growth, from 3.1 per cent to 1.6 per cent. While that would be far short of the record 0.1 per cent global contraction in 2009, it wouldn't be much different than two earlier deep world recessions, in 1975 (1 per cent growth) and 1982 (0.7 per cent).






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