Around the time John McCain named Sarah Palin as his running mate, countless pixels and column inches were being dedicated to explaining why the next 100 years would be the Chinese Century. The 2008 Summer Olympics in Beijing were declared the nation’s “coming out” party, an ostentatious flaunting of the wealth it had amassed during decades of staggering economic growth. Meanwhile, the U.S. economy was in the midst of almost unprecedented turmoil.
Seven years, it turns out, can be a long time. The world’s second largest economy has just endured a shambolic summer in which the Shanghai stock market tumbled and the nation’s leaders flailed in their efforts to prop it up. Slowing growth—and more broadly, the nation’s apparent inability to transition gracefully from an economy largely dependent on building roads and bridges to one driven by consumers—is worrying investors around the world.
Chances are your personal wealth has already taken a hit as a result: The S&P 500 is down 11% over the past three months as markets priced in the lack of demand from China. And the Dow dropped more than 300 points on Monday, at least partly because of slowing Chinese growth.
Now market watchers are buzzing about a recent report from Citibank chief global economist Willem Buiter (subscription required) that suggests China’s slowing growth could push the entire world economy into recession. China, Buiter notes, is exhibiting the tell-tale signs of a recession in capitalist economies, including lots of private debt and “irrational exuberance” in real estate and stock markets.
If that happens, China will join Russia and Brazil in the recession zone, and likely drive other emerging market economies down with them as China’s once insatiable demand for their natural resources flags. Indeed, Buiter says, emerging markets have slowed considerably since 2010, even as mature economies like those of the U.S. and Germany have started to grow again. “No [emerging market] of any significance is outperforming our forecasts since the beginning of the year or earlier,” writes Buiter. “Most are underperforming.”
“Policy options to prevent a recession exist but are, in our view, unlikely to be exercised in time,” Buiter concludes. Rather than investing in infrastructure, he argues, the central government should consider investing more in the health and education of its citizenry. Even a one-time transfer to the rural poor would help boost demand and incrementally push the country towards the next stage of economic development. But he doubts it will happen.
Keep in mind that a world recession doesn’t necessarily imply a deep U.S. recession. Yes, U.S. economic growth is likely to slow as American companies that sell to foreign markets face weaker demand. And a strengthening dollar would make our exports less competitive abroad. But even if we do tip into recession, Buiter expects it to be shorter and shallower than the last one.
That’s a relief.