Forecasters have long eyed the health of established players on the world stage such as the United States, Germany and Japan for guidance on where the global economy is headed.
The world economy, however, is now increasingly driven, for better or worse, by the economic behemoth to the east: China. But China, now home to the world’s second largest economy, is slowing down.
That deceleration, according to Marci Rossell, a main platform speaker at the Million Dollar Round Table 2016 annual meeting in Vancouver, British Columbia, on Monday, can be expected to dampen global growth going forward.
“In recent years, the global economic narrative has been driven by China’s economy,” said Rossell, a former chief economist for CNBC and now “the economista” at Delphin Investments. “This China-fueled narrative will continue” at a relative plod.
Compared with the go-go years of the early 2000s, when gross domestic product was expanding at a 9 percent-plus annual clip, China’s GDP growth will likely not top 5 percent in the next few years, and perhaps cap out at 3 percent, said Rossell.
Why the slowdown? The causes, said Rossell, can be traced to 2001, when China gained entry into the World Trade Organization and effectively became the “world’s workshop.” Products that were designed and conceived in the United States, Europe and Japan were manufactured, assembled, packed and shipped in China because of the country’s low labor costs and huge investments in plants and equipment needed to achieve economies of scale.
The transition also entailed mass migration: Over a 10-year period, said Rossell, more than 270 million rural Chinese relocated to big cities — Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Donguan — to work in new manufacturing facilities populating the urban landscape.
The movement of people (most of them farmers) on such a large scale made China a net importer of agricultural products it once grew domestically, most notably grains such as rice, wheat, corn and barley. U.S. agribusiness stepped in to fill the void, exporting to China fully a quarter of the $14 billion of agricultural output in 2014.
Effect of the Great Recession
Then, said Rossell, came the financial and credit crisis of 2007-2009. Responding to this downturn, which was the worst on record since the Great Depression of the 1930s, both the U.S. and Chinese governments instituted economic stimulus packages.
But relative to the size of its economy, China’s plan (at U.S. $586 billion) was the larger of the two.
The spending was successful in warding off a recession. Indeed, noted Rossell, China’s government spent more on cement in one year than the United States did over a 100-year period.
But the Chinese government splurge came with some big negatives. Among them: Vast and wasteful overbuilding of residential and office complexes that, to this day, remain unoccupied; and a huge increase in debt, particularly among local governments and state-owned enterprises.
“Many of the loans extended during this period became non-performing,” said Rossell. “This became an enormous drag on China’s economy. They went from real estate boom to real estate bust.”
If this story sounds familiar, it is. In the 1980s, said Rossell, Japan went through the same boom-and-bust cycle, and its economy is still reeling from the aftershocks. Japan is still the world’s third largest economy (after the United States and China), but it continues to suffer from low growth, stagnant productivity, and prices for consumer and commercial goods verging on deflation.