Will the BRICs (read: China) really become the new global growth engine?

Markus Jäger, VOX, 26 de septiembre de 2009

The BRIC countries’ economic growth is holding up relatively well.

While the US (and many of the advanced economies) will register sub-par growth for the next few years due to continued household and financial sector deleveraging, the BRIC countries – more likely than not – will be steaming ahead, albeit at slightly lower growth rates than before the crisis. This year, the Chinese and Indian economies will expand more than 8% and 6%, respectively, while Brazilian growth will be flat. Only Russia will be experiencing a sharp economic contraction. Average weighted real GDP growth in the BRICs will be 7-8% versus maybe 2.5% in the US. At market exchange rates, the BRIC share of global output is 15% (the US share is 24%).

Does this mean that the BRICs will be replacing the much-touted US consumer as the world’s main growth engine? Well, it all depends on what one means by “growth engine”.

The 800-pound panda in the room

Among the BRICs, China is the 800-pound panda in the room. China’s economy is twice as large as those of the other BRICs combined. China’s growth rate is almost twice that of the others. China’s exports are more than twice as large as those of the other BRICs combined, and last year its current account surplus was more than ten times larger than those of the other BRICs combined. If China maintains near double-digit growth rates, its contribution to global growth will continue to vastly outweigh that of the other BRICs.

The first question, therefore, is whether China’s government-engineered recovery will be self-sustaining. The honest answer is that we’ll have to see. It looks like the Chinese response depends a recovery in (global) demand, as both its bank-lending surge and fiscal stimulus are biased towards a (temporary) increase in investment rather than a (permanent) increase in domestic consumption (Guo and N’Diaye 2009). If global demand does not recover in time or the stimulus measures fail to stir the animal spirits, China may end up creating overcapacity and/ or unproductive investment.

Before the crisis, considerable disagreement existed – even by standards of the economics profession – as to the dependence of Chinese growth on external demand. Not surprisingly, there is no consensus today as to what extent China will manage to replace external with domestic demand and thus return to trend growth. The IMF believes that export demand contributed more than 30% to Chinese growth in 2001-08 (IMF 2009). Others believe that exports contributed 5% to growth until 2004 and only around 20% in 2005-07 (DB Research 2009a, b). Yet others view external demand as even less important. Whatever the answer, let’s assume, for the sake of argument, that China succeeds in maintaining a growth rate of 10% per annum over the medium term.

Will China be able to offset slower US growth? Doing the maths

Will China be able to offset slower US growth? The US and China make up around 21% and 11% of global GDP (on a PPP basis), respectively. The US consumer, accounting for 70% of US GDP, will remain a drag on US growth over the next few years, while Chinese stimulus measures may just succeed in offsetting both the decline in external demand and its knock-on effect on Chinese domestic demand. It looks impossible for China to offset the expected decline in US growth in the near term. This would have required China to add 4-5 percentage points to its growth rate during 2008-10. However, as China’s economic size continues to increase – rising from just over 50% of US GDP in 2007 to 85% in 2014 – and as its economy continues to grow rapidly, the drag of lower US trend growth on global aggregate growth will diminish.

Will China’s contribution to global growth increase? Due to (near) double-digit growth rates, the size of the Chinese economy will continue to increase relative to the US (and all other countries), while the US share of global output will be stagnating. China’s relative contribution to global growth will therefore continue to increase. According to the IMF, China will add a full percentage point per year to global output growth in 2008-10 (and thus account for 50% of global growth), while the US will “subtract” an average of 0.1 percentage points per year from global output during the same period (Figure 1).

Figure 1. China's contribution to global growth will continue to increase

Source: IMF.

By 2014, assuming things are back to normal, China and the US will account for around 30% and a little over 10% of global growth, respectively – and this assumes relatively optimistically US growth of more than 3% per annum In this sense, China will be the global growth “engine”. But this is nothing new. China’s contribution to global growth amounted to 20% during the better part of this decade, almost twice size of the US contribution.

To what extent will Chinese growth drive demand and growth in the rest of the world? Recently, Chinese imports have been growing faster (or declining more slowly) than Chinese exports, resulting in a deterioration of the trade balance. A decline of China’s net exports by some $160 billion – China’s current account is forecast to fall from 10% of GDP to 5% of GDP in 2009 – would add the equivalent of 0.3% to demand in the rest of the world (DB Research 2009a).

Unless one assumes the presence of excessively optimistic multipliers, this won’t add much to either global demand or US (and EU) growth. Assuming China’s bilateral trade surpluses decline in equal measure, increasing Chinese net imports would add less than 0.1% of GDP to US final demand this year. This simply pales in comparison with the discretionary fiscal stimulus measures, excluding automatic stabilisers and monetary stimulus measures, implemented in the US (and other advanced economies).

An important caveat is that Keynes’ “animal spirits” and mainstream economists’ multiplier effects are difficult to quantify, especially under crisis conditions where non-linearities reign supreme. However, even under wild assumptions, it is clear that China won’t have much of an impact on growth in the US or the EU, or even, perhaps more arguably, Japan.

The situation may be somewhat different in the case of the “smaller”, open Asian economies. Korean exports to China, for instance, amount to 7-8% of GDP, while US exports to China amount to less than 0.5% of GDP.

Conclusion

In conclusion, China’s contribution to global growth will continue to increase, even if China will not be able to offset the reduction in global growth stemming from lower US (and EU) growth in the next few years. China will account for a full one-third of global growth post-crisis, and this share will keep rising, while the US share will continue to hover around 10%. It may hence be correct to say that China is “leading” global growth size- and timing-wise. But this is nothing new. Historically, the Chinese economy has moved much less in line with global growth than other economies, and China’s contribution to pre-crisis global growth was already substantially larger than that of the US. Last but not least, although China is making a significant contribution to global growth, it is not going to be “driving” growth in the developed economies (see Figure 2). Nor are indeed the BRICs.

Figure 2. BRICs won't be driving growth in developed economics

Source: UN.

References

DB Research (2009a) , Responding to the crisis: Did China and Brazil miss an opportunity?, Talking Point, August.

DB Research (2009b), Rise of the BRICs revisited, Talking Point, June.

Guo, K. and N’Diaye, P. (2009), “Is China’s export-oriented growth sustainable?”, IMF Working Paper 09/172.

IMF (2009), “World Economic Outlook, Crisis and Recovery”, Washington DC, April.