The effect of China’s slowdown on the growth of Asian countries that have come to constitute its supply chain is well known. Less attention has been paid to the potential impact on capital exporters such as Germany, South Korea and Japan. The IMF spillover report published last month finds the impact could be significant in cutting growth in all three countries, and notably Germany.
The Fund’s annual spillover reports examine the external effects of domestic policies in the five key economies, China, the Euro Area, Japan, the U.K. and the U.S. While the risks of financial shocks and the global lack of demand are primary focuses, the report also looks at policy risks, which in China’s case are China growth and rebalancing. It notes the progress in adjusting the exchange rate and reducing the current-account surplus. But warms that “the adjustment investment-led in an economy with already high investment rates, an abrupt reversion could yield negative spillovers”.
The charts, taken from the report, assume a sharp reduction in investment, not the gradual one, accompanied by a switch to greater consumption that is a key policy goal for Beijing. The first pair are based on a simple regression analysis, the second pair on more complex factor augmented vector autoregressions, which also include second and third round effects, as highly open economies like Germany’s are hit not only directly but also via the hit to their own trading partners.
The final pair of charts look at real estate investment, which accounts for a quarter of all investment in China and whose managed slowdown has been a policy priority for Beijing. That a sharp 1% slowdown in investment in Chinese real estate could knock upwards of 0.5% off real GDP growth in Germany, South Korea and Japan and have smaller but not insignificant impacts in Europe and the U.S. makes for sobering reading.