China’s economy is slowing down a little or lot

A sharp slowdown in China’s GDP growth rate to 2.3% during 2016-2018 would disrupt global trade and hinder growth, with significant knock-on effects for emerging markets and global corporates, according to a study by Fitch Ratings. In turn, this would keep short-term interest rates and commodity prices lower for longer. This hypothetical scenario does not reflect Fitch’s current expectations for China’s growth, but is designed to test credit connections between China and the rest of the world.

Global GDP growth is currently expected to be 3.1 percent in 2017, according to Oxford Economics’ global economic model which was used by Fitch to frame its “shock” China scenario. But if a slowdown of such a magnitude materialized in China, Fitch said global GDP growth would slow to 1.8 percent in 2017.

As a result, any rise in U.S. and euro zone short-term interest rates would be postponed, and oil prices would remain under pressure, Fitch said.

While Fitch emphasized that this hypothetical scenario did not reflect its current expectations for China’s growth, it was “designed to test credit connections between China and the rest of the world.”

In its latest Global Economic Outlook (GEO) Fitch Ratings forecasts the global economy will grow by just 2.3% in 2015, the weakest since the global financial crisis in 2009, dragged down by a recession in Brazil and Russia and a structural slowdown in China and many emerging markets (EM). We forecast a pick-up to 2.7% in 2016 and 2017 as growth recovers somewhat in EM. Growth in major advanced economies (MAEs) is forecast to strengthen to 2% in 2016, the fastest since 2011.

Fitch’s baseline forecast for China is a gradual slowdown to 6.3% in 2016 and 5.5% in 2017, from 6.8% in 2015. Although investment is slowing sharply, growth continues to be supported by robust consumption and policy easing. However, there are downside risks from the real estate sector, capital flows, and policy settings.

India takes over as the fastest growing BRIC this year with 7.5% GDP growth, accelerating to 8% in 2016 driven by structural reforms and higher investment. The current deep recession in Russia and Brazil (-4% and -3% in 2015, respectively) will be followed by only a weak recovery starting in 2016 in Russia (0.5%) and only in 2017 in Brazil (1.2%).

China’s growth rate is expected to be 6.8 percent in 2015, according to the International Monetary Fund’s latest “World Economic Outlook” report published in October.

Although robust, that growth rate has been slowing down year on year, reflecting slower economic conditions in the rest of the world. In 2013, China’s economy grew 7.7 percent but in 2014 China’s GDP expanded by 7.3 percent. The IMF predicted further slowing growth in 2016, of 6.3 percent.