China: A Limit To Its Global Impact

With the United States and Europe facing recessions in 2009, many are looking to pass the baton as “growth engine of the world” to China. In order for China to assume this role, private consumption in the country has to expand, and the country has been doing all that it can towards this end. While the rest of the world has been treating the financial crisis with massive doses of monetary stimulus, China has lead the way with an unprecedented fiscal stimulus package designed to encourage private consumption. Countries around the world, beginning with the United States under a Barack Obama administration, may soon follow suit with fiscal stimulus packages of their own.

 But how much of an impact can China realistically have on the global economy? First of all, the country is facing its own tough challenges. A falloff in export growth, a sharp stock market sell-off, softer property prices and a constant barrage of bad news from around the world has taken its toll on the Chinese consumer. As a result, the fourth quarter is turning out to be an especially tough one. Moreover, many are expecting difficult conditions to continue into next year. 

According to The Wall Street Journal, China is worried about the jobs picture now and into 2009 as the country struggles to create 10 million new jobs every year.

Unemployment in China worsened in October and is likely to deteriorate through the first quarter of 2009, officials said in an unusually frank discussion of their concerns about joblessness. The global slowdown has had a particularly harsh impact on exporters and labor-intensive small businesses in China’s coastal areas, costing many rural migrant workers their jobs, said Yin Weimin, minister of human resources and social security.

“The current employment situation is still grim,” Mr. Yin told a news conference in Beijing. “Our judgment is that in the first quarter of next year there will be even greater difficulties.” Bankruptcies and temporary shutdowns of factories have cost many rural migrant workers their jobs, he said.

The comments come amid what appears to be a rise in work-related protests as China’s economy slows sharply. Cab drivers in several major cities have staged work stoppages in recent weeks, while laid-off workers have protested at closed factories in southern China.

Secondly, it’s important to keep in perspective China’s size in relationship to the global economy. According to figures provided by the International Monetary Fund, global Gross Domestic Product totaled $54.6 trillion in 2007. Of this amount, the United States and the European Union accounted for $30.7 trillion, or 56 percent of the total. The United States leads the world with $13.8 trillion of GDP, while the European Union has a total GDP of $16.9 trillion. Because they currently account for such a lion’s share of the global economy, recessionary environments in the United States and Europe in 2009 will have a large impact on the global economy, no matter what happens in the rest of the world.

For all of its double-digit growth over the past five years, and despite the fact that it has most likely already surpassed Germany as the third-largest economy in the world, China’s GDP in 2007 was just under $3.3 trillion, or only 6 percent of global GDP. No matter how fast China grows in 2009, it simply cannot by itself offset the impact of recessions in the United States and Europe. In fact, there is no country or region of the world that can.

For the record, the five largest economies in the world in 2007 were: (1) the United States at $13.8 trillion; (2) Japan at $4.4 trillion; (3) Germany at $3.3 trillion; (4) China at just under $3.3 trillion; and (5) the United Kingdom at $2.8 trillion.

Even adding in the other BRIC countries doesn’t have near the impact of the United States economy alone. In 2007, Brazil and Russia with GDPs of approximately $1.3 trillion, and India with a GDP of $1.1 trillion, ranked #10, #11 and #12 in the world, respectively. Total BRIC GDP of approximately $7.0 trillion represented only one-half that of the United States, and only 13 percent of global GDP.

For better or for worse, the global economy still depends for the time being on the governments in the United States and Europe getting it right. Let’s hope that they do.

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