The stock market is nowhere near forecasting an immediate recession, with earnings estimates on the rise and stock prices still holding up – although I’m not in the “market is getting so expensive” camp. Compared to most other points in time than December 2022, pricing is notably lower – although in Norway, we’d have to credit the oil price.
What to fear now? Many observers point to China. I wouldn’t bet against a sharp decline in Chinese GDP growth, although I suspect that official statistics may be tainted. Now, I’m not worried about the Chinese economy as such. I’m selfish enough to wonder how we may be affected in our relevant markets.
Please allow me a little detour. You may happen to know that the polar bear is the world’s biggest bear. But do you know why?
This is all about three-dimensional geometry. For polar bears, the ratio of volume to surface is higher than for other bears, simply because that’s what happens when you get bigger. Stick insects have a lot of surface relative to the volume of their bodies. This poses a problem in cold climates, because you may lose a lot of heat while having a very low capacity for storing heat. You don’t see many such insects on ice floes.
Confused? The point is that China is actually a relatively closed economy. Not because President Xi Jinping is wary of knitting closer ties to other economies, although right now, he might just be a bit apprehensive of their US ties. It’s due to the sheer size of the Chinese economy. If you are that big, your insides are large relative to your interface with the rest of the world.
And you have less of an impact on the rest of the world than people may realize.
Yes, the Chinese economy is still expected to grow faster than the world economy – or so the IMF thought in April. And it may still be the case that Chinese growth represents a major share of global growth. It doesn’t necessarily mean that much for growth in the rest of the world, however. Much of this growth takes place within China, which – in a polar-bear kind of fashion – is still a fairly closed economy.
Let’s do some figures. Imports make up about 17% of the Chinese GDP, as opposed to almost the double – 33% – for the world on average. China’s imports make up slightly more than 10% of global imports … or 3.25% of global GDP. Even if Chinese imports were to fall by 20% – it’s not unthinkable – the reduction would only represent a negative impulse of some 0.6% of global GDP. Certain companies, like luxury goods producers, might be hard hit, but this is about the bigger picture.
So, reiterating my point here … what’s the impact on growth in the rest of the world?
That, of course, is a hypothetical question. But it doesn’t keep me awake at night.
Finn Øystein Bergh
Chief Economist & Strategist
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