“Our core scenario is that China will grow by 7.4% in 2013,” write the analysts at Societe Generale. “There is still a chance however that China could land hard, with growth of less than 6%.”
This is how they began a recent 30-page report to clients titled What if China lands hard?
“The US would suffer the smallest effect from a Chinese hard landing, while Other emerging the eurozone would be more seriously affected,” writes SocGen’s Wei Yao.
More from the note:
Does the starting point for the global economy matter?
Our what-if analysis of a China hard landing draws on a wide body of academic research that analyses various shocks and how these disseminate to the global economy. These analyses often implicitly assume the starting point of an economy in equilibrium and with a well stocked arsenal of policy ammunition. The current situation is very different, however, with large output gaps in many of the world’s major economies, ongoing headwinds from deleveraging and policy arsenals already depleted. Add a China hard landing to the mix, and we expect the result would be a far greater uncertainty shock than had the starting point been a world in overall good health. Uncertainty would cause corporations globally to hold back further on investment and hiring decisions (even those not directly exposed to China). And, feedback loops from financial channels would further amplify the uncertainty shock as risky asset prices collapse. At the global level, we estimate that the combined uncertainty shock in our China hard landing scenario could exceed 1% of global GDP.
Here’s how a hard landing would ripple through the world, according to SocGen:
Photo: Societe Generale