Never mind Greece, China is real threat to the global economy, says Standard Life Investments

New research from Edinburgh-based Standard Life Investments suggests that the biggest threat to the global economy is currently China.

In the latest edition of Global Outlook, Standard Life Investments investigates what is driving China’s growth slow-down and looks beyond simple GDP figures.

Jeremy Lawson, Chief Economist, Standard Life Investments, said: “China is seeing its slowest rate of economic growth since the financial crisis, along with rapidly declining commodity prices, falling export trade and a dramatic deterioration in nominal activity. However, the epicentres of China’s economic problems are the industrial and property sectors.

“Growth of industrial output has declined from 14 per cent in 2011 to around 6 per cent in 2015, whilst industrial electricity consumption is in outright decline. China’s trade with the outside world is falling, and real estate investment – the primary engine of growth until last year - is going through a prolonged slump.

“The main components of activity preventing a deeper downturn are: private spending on financial services, government-led spending on transport infrastructure, retail sales and services-led electricity consumption. This suggests that China has begun the rebalancing towards a more sustainable, consumption-led growth model – although it’s too early to claim success.

“A hard landing in China would obviously be a large negative shock for the global economy, representing as it does 12 per cent of global GDP and 18 per cent of global manufacturing exports. Some countries stand to lose the most from any failure of China to stabilise growth. On the commodities front, countries like Australia, Brazil, Canada, Chile and Peru stand out. In manufacturing - Hong Kong, Korea, Malaysia, Singapore and Taiwan are most exposed. Whilst developed economies like Germany export a sizable amount of capital goods to China.

“There is good news – our research shows that most of the emerging markets are in a much better position to withstand external shocks than they were in the 1990, thanks to improved fiscal and monetary frameworks.

“Overall, the government has stepped up the pace of structural reforms - liberalising the financial system, cracking down on corruption and loosening fiscal policy, albeit in a targeted way. As a result we expect there to be modest success in boosting GDP although the longer-term glide path is towards slower growth.”