Analysis of Bank Austria Economics Department:
Growth downturn in China a very tangible problem for Austria, but manageable on the whole

  • Sharper slump in Chinese growth would exert pressure on global economy
  • Germany under greatest pressure in Europe – which is less affected on the whole – but Austria influenced more than most too
  • Growth down by 1 percentage point in China means weaker economic output in Austria by up to 0.3 percentage points
  • Stress scenario: Economic output in Austria down by 1.5 to 2.5 percent in 2020 due to trade ties and problems caused by financial markets
  • Lower raw material prices will compensate somewhat for negative effect: so overall impact still acceptable for Austria, even in stress scenario

"Concerns about economic developments in China are justified. The slower growth in the most important emerging market is hindering the global economy, and Austria is unable to escape the negative consequences of this either. Nonetheless, the impacts on the domestic economy are manageable on the whole, even if Austria is more affected than most other European countries", said Bank Austria chief economist Stefan Bruckbauer, summarising the latest analysis1 of Bank Austria on the economic implications of low growth rates in China for the Austrian economy.

The Chinese economy has become a global player in recent decades. In the meantime the largest emerging market in the world accounts for more than 13 percent of global economic output and welcomes roughly 10 percent of global goods exports. "Posting growth rates of approximately 7 percent, China alone has contributed roughly one percentage point of the annual increase in global GDP in recent years amounting to around 3.5 percent", explained Bank Austria economist Walter Pudschedl.

China exerts substantial influence on global economy
Given the size of its economy and its substantial role in global trade, China now exerts a major influence on the global economy. "A slowdown in growth in China will have tangible consequences for the global economy. And it is now inevitable that growth rates will be lower in China over the coming years than has previously been customary", said Pudschedl, firmly convinced. The transition from an export and investment driven economic catch-up process to a more balanced and sustainable growth model requires structural changes that go hand in hand with flatter growth rates on a long-term basis. So the question is not whether growth will slow down in China, but by how much, depending on the economic policy measures put in place.

If suitable measures can facilitate a soft landing for the Chinese economy, and growth in China weakens as expected from the current 7 percent to around 6 percent over the coming years, the economists at Bank Austria believe the consequences for the global economy will be manageable. "Our calculations show that a decline in Chinese economic growth by one percentage point deprives the global economy of approximately 0.4 percentage points in growth. At 0.25 percentage points the impacts on Europe would be noticeably lower", revealed Bruckbauer, before adding: "This, however, means that the burden on Austria is disproportionately high by European comparison, at more than 0.3 percentage points."

Austria affected more than most within Europe
The estimated consequences of slower growth in China are primarily based on foreign trade as a transmission channel, and both direct as well as indirect trade are affected via third country second-round effects. This also explains why Austria is affected more than most within Europe since the Chinese economy exhibits a higher final demand for Austrian added value than a mere glance at direct exports from Austria would suggest, mainly because of the high level of supplies heading from Austria to Germany. The significance for Austria of exports to China almost doubles from 1 to 1.7 percent of GDP when these indirect exports are taken into account. This Bank Austria calculation of the global consequences of slower growth in China not only deals with foreign trade but also with the development of the financial markets – in the shape of stock market slides and higher risk premiums.

Even if there is no "soft landing" in China and the Chinese economy experiences a significant slowdown, the impacts on the global economy would be manageable, albeit noticeably unpleasant. In a stress scenario the Bank Austria economists assume Chinese economic growth will weaken from the current 7 percent to roughly 3 percent in the years to 2020.

Stress scenario tolerable for Austria too
In this case – which is currently unlikely to happen – economic output in China would be more than 8 percent lower in 2020, compared to the main scenario of a slowdown in economic output to roughly 6 percent. The implications of an unexpectedly sharp decline in GDP growth in China would translate to a setback of around 2 percent for Europe. The global economy is affected even more with a figure of almost 3.5 percent. The negative influence on the USA would only be slightly higher than for the eurozone, while Japan and other Asian countries would be affected particularly heavily given their strong economic ties and their geographical proximity.

Looking at Europe, the consequences would be most severe for Germany, as expected. Indirectly this means a significant effect for Austria too, said Stefan Bruckbauer, concluding: "The impact of a severe slowdown in China from currently 7 percent to 3 percent by 2020 would mean a dip in economic output of between 1.5 to 2.5 percent in Austria, taking into account the transmission channels of foreign trade and the financial markets. With oil prices expected to fall this effect would be mitigated by around one percentage point though, which means although the Austrian economy would be affected more than most by European comparison, the dampening effect would still be manageable, even in this unlikely stress scenario."

 Charts (PDF; 141KB)

1The analysis: "Wie lang ist der Arm Chinas? Auswirkungen einer Wachstumsabschwächung in China auf Österreich" is available in German only and can be downloaded for free here.

Bank Austria Economics & Market Analysis Austria
Walter Pudschedl, Tel.: +43 (0) 50505 - 41957;
E-mail: walter.pudschedl@unicreditgroup.at