International Economic Week In Review: China Sneezed And We All Caught A Cold

What’s behind the Chinese sell-off? It’s partly due to an expensive market. But equity markets are leading economic indicators, meaning a connection exists between the overall Chinese slowdown and its equity market. Last year, the OCED’s general economic assessment of the world economic environment offered the following explanation for China’s slower growth:

A key uncertainty stems from the unexpectedly sharp slowdown in world trade growth this year, to an estimated 2%. Over the past five decades there have been only five other years in which global trade growth has been 2% or less, all of which coincided with a marked downturn of global growth (Figure 1.7). In part, the current trade slowdown reflects weaker global GDP growth. But the slowdown has been more pronounced than might have been expected on the basis of past relationships with global output growth, even given the post-crisis decline in the elasticity of trade to output. In the early stages of the recovery, moderate trade growth largely reflected weak demand in the advanced economies, especially in the trade-intensive euro area (Ollivaud and Schwellnus, 2015). More recently, the weakness stems from the EMEs. A substantial proportion of the overall slowdown in global trade growth this year relative to 2014 is accounted for by a decline in import volumes in the non-OECD economies (Figure 1.2), reflecting both weaker demand growth and a reduction in import intensity. This has contributed to weaker external demand in the advanced economies. All told, the slowdown in non-OECD import demand this year and next, relative to earlier projections (OECD, 2015a), is likely to reduce OECD GDP growth by 0.4 percentage point per annum, all else equal.

The report next notes that in 2015 Brazilian and Russian imports decreased by 10% and 20%, respectively. Chinese imports account for about 1/3 of the drop. And the Chinese decrease in imports has negatively impacted two regions: Asian trading counter parties and southern hemisphere countries such as South Africa and New Zealand. The following graphs show the drop in overall exports and the net impact on specific countries: