by Rich Miller
When Japan’s economy downshifted dramatically in the 1990s, the rest of the world managed to do just fine. Now, as China suffers a sustained slowdown, there’s a group of economists who say the same may well happen again.
Sure, global growth already has been clipped by the deterioration in China’s expansion. It is, after all, the world’s second-largest economy, just as Japan was back then.
Yet there are reasons to suspect that all the hand-wringing about China pulling down the rest of the world may be a tad overdone. Just as the country’s slump is producing obvious losers -- commodity exporters being a prime example -- it’s producing winners as well. Airlines, automakers and U.S. consumers are among those making out from the steep decline in prices for energy and other raw materials the China slump has wrought.
And it’s these less-publicized beneficiaries that will help the world withstand a protracted period of sub-par performance by China -- provided, of course, it avoids a hard landing and continues to shift the focus of its economy toward consumers and services and away from investment and exports.
"There will be pain and suffering," said Peter Hooper, a 26-year veteran of the Federal Reserve who is now chief economist for Deutsche Bank Securities in New York. "But as long as the slowdown happens gradually, I don’t think it will be a major problem” for global expansion.
Chinese President Xi Jinping said Nov. 3 that average annual growth should be no less than 6.5 percent in the next five years. That suggests leaders are ready to accept the weakest period of expansion since the economy was opened up more than three decades ago.
Even this goal might prove too ambitious, said Nariman Behravesh, chief economist in Lexington, Massachusetts, for consultant IHS Inc. He sees the annual average at 5.5 percent to 6 percent.
Just as Japan did in the 1990s, China runs a trade surplus and so is a net supplier to the rest of the world rather than a source of demand, said Danny Gabay, a former Bank of England official who is now co-director of Fathom Consulting in London. This means the impact of its deceleration on overall global growth will be much more muted than if the U.S. suddenly downshifted.
And while China’s economy is bigger and more internationally integrated than Japan’s two decades ago, it isn’t projected to undergo as sharp a swoon: Japan suffered a so-called lost decade when growth averaged about 1 percent a year from 1991 through 2000 after its real-estate and stock- market bubbles burst.
Computer simulations by JPMorgan Chase & Co. economists found that a 1 percentage point drop in Chinese growth would knock about half a percentage point off the pace of global expansion, with other emerging markets most affected. The U.S., with exports to China amounting to just about 1 percent of gross domestic product, comes out virtually unscathed as American consumers benefit from lower import prices.
Not everyone is so optimistic. Economist David Levy says the world economy is close to entering a recession led by steep cutbacks in spending by China and other emerging markets.