18 November 2019

What if the Chinese and Indian Economies Don't Bounce Back?

The slowdown that has occurred in most of the world’s developed economies in recent months had been forecasted by most of the world’s leading economists.  Nevertheless, while growth has slowed in North America, Europe and parts of developed Asia, these economies have proven to be more resilient in the face of internal and external pressures than had been expected, at least so far.  

Instead, many of the leading concerns facing the global economy are coming from the two countries that are expected to be the leading drivers of growth for businesses and investors in the coming decades.  In fact, the recent economic performances in China and India are a cause for significant concern for the rest of the global economy, not to mention businesses and investors that have staked much of their futures on these two giant emerging markets generating a large share of their future growth.  If the recent downturn in fortunes for the Chinese and Indian economies persist, there will be major repercussions for the global economy, as well as for many leading sectors of the economy.


China's Slowing Economy

China’s recent economic performance has been deeply troubling.  Not only has the country’s official rate of economic growth fallen to 6%, but the actual health of the world’s second largest economy is probably much worse than these figures indicate.  There are a number of reasons why China’s economy has struggled significantly in recent years.  In recent months, it has been the ongoing trade war with the United States that has caused serious disruptions of vast swathes of the Chinese economy.  At the same time, consumer spending growth in China has trended sharply downwards over the past two years.  While these factors have reduced growth in recent years, the fact is that the days of double-digit economic growth in China ended in 2011 and will not return.  

After growing by an average of 10% per year from the early 1980s until the early 2010s, growth rates have trended downwards in recent years and are now on the verge of falling below 6%.  However, even as the Chinese economy slows, it is forecast to account for 31% of the additional economic growth generated in the world over the coming year, meaning that China has a larger potential impact on the direction of the global economy than any other country.

As China’s economy moves forward, it is facing a series of major challenges that it must overcome if it is to avoid an even greater slowdown.  First and foremost, weaker export markets and the continuing trade war with the United States threaten to extend China’s current export slump.  At the same time, many of the competitive advantages that China used to become the world’s leading manufacturing country have gradually eroded, weakening what had been the core of China’s economic miracle.  While China’s external situation is becoming more challenging, a number of domestic weaknesses have emerged, including a worsening debt crisis and falling levels of consumer confidence.  Furthermore, China’s demographic situation could prove to be a crisis-in-waiting as the country’s working-age population begins to shrink rapidly thanks to decades of extremely low birth rates.  

Altogether, these challenges could prove to be too much for the Chinese economy to overcome and could usher in a prolonged period of much lower rates of growth for China.  If we look a few years back at the economic growth forecasts for China for the present day, we can see that the actually growth rates of the past couple of years are well below the levels foreseen by most forecasters earlier in this decade, so the possibility of much slower growth for China in the coming years must not be ruled out.

India's Broken Promise

While China was expected to see gradually slower rates of economic growth, India was expected by many to become the world’s fastest-growing large economy by a wide margin.  However, India’s economy has experienced a great deal of turbulence in recent years, and in the first half of this year, the Indian economy expanded by a very disappointing 5.4%, with growth falling to just 5.0% in the second quarter of 2019.  

There are a number of reasons for this relatively slow growth and high volatility, but the main reason for this disappointing performance is a series of missteps in terms of economic and monetary policy by the Indian government that have caused major disruptions to many key sectors of the economy.  Add to this the difficult external situation facing India and it is easy to see why India has been one of the most disappointing economies in the world over the past year.  Meanwhile, despite the fact that the Indian economy is just one-fifth of the size of the Chinese economy, many businesses and investors are counting on India to provide for an increasing share of their growth as their largest markets in North America, Europe and East Asia are forecast to slow in the coming years.

Going forward, the Indian economy is also facing a series of significant threats that could prevent it from achieving the levels of growth and development that it hopes to reach.  Sure, India’s population is forecast to grow at a much faster rate than any of the world’s other largest economies, but much of India’s population remains very poor.  Meanwhile, India has done a relatively poor job in terms of attracting the levels of investment it needs to diversify and modernize the country’s economy and infrastructure.  This is due to a number of internal and external factors.  For example, India is still plagued by over-regulation and over-protection, factors that have deterred many potential investors from committing to India over the long-term.  

Meanwhile, India is facing many external challenges, including rising trade barriers and the trend towards localization, factors that could prevent India from developing the sorts of export-oriented industries that propelled much of China’s growth in previous decades.  As a result, not only has India’s recent economic performance been disappointing, but its future outlook is not as assured as many experts had expected.

The Global Impact

Any disruptions to the Chinese and Indian economies will have a major impact on the global economy for the foreseeable future.  China is now the leading driver of global economic growth and will remain so as long as the country can generate higher rates of economic growth than North America or Europe.  India, while a much smaller and poorer economy, is being counted on to be a leading generator of growth over the long-term for businesses and investors around the world thanks to the fact that its population will rise to more than 1.6 billion within the next 30 years.  Therefore, China will continue to account for at least 25% of the world’s additional economic output over the next decade, while India’s share will rise sharply from less than 8% today to more than 14% by the end of the next decade.  However, should either of these economies experience a long-term slowdown that is worse than expected, these economies will not generate the levels of growth that are foreseen, dealing a major blow to a global economy in search of new drivers of growth.

The fact that the world’s leading contributor to global economic growth and its should-be fastest-growing large economy are both experiencing significant difficulties is a very worrying sign for the global economy as it prepares to enter 2020.  In fact, if these troubles persist, 2020 could be a much more difficult year for the global economy than is currently foreseen.  

The obvious impact is that the global economy will grow at a much slower rate than in previous years.  However, there are other threats posed by the current troubles in China and India.  For example, a prolonged slowdown in either economy could result in a serious loss of business and investor confidence as their key growth markets fail to produce the results they envisioned.  Such a loss of confidence could lead to much lower levels of trade and investment, something that would damage longer-term growth prospects for the global economy.  For countries and businesses that depend upon exports for much of their growth, weaker markets in China and India would be devastating for long-term growth prospects.  In turn, this could raise political tensions even further, both in China and India as well as in those countries negatively impacted by the economic struggles of those two giant emerging markets.  

In fact, should China and India truly experience a long-term slowdown, it is hard to envision how the global economy will be able to generate significant growth over the longer-term as global population growth slows and as productivity growth remains weak at best.  Therefore, what happens in China and India in the coming months and years will have a massive impact on the wider world for a long time to come.