The portents from China are not good. There are ominously titled news articles aplenty; the WSJ asked in August if a global recession is brewing in China. Wonkblog asks How China could trigger a global crisis:

When China sneezes, the rest of the world might not catch a cold, but it does feel bad for a couple of days. The question, though, is whether China is sicker than it seems and how contagious that would be for the global economy.

A common thesis is that the crisis in China forces a policy retrenchment that involves a yuan devaluation that in triggers a currency war. I don’t doubt that emerging market currency values hinge, in many cases, on the Chinese currency’s value, or alternatively, on commodity prices. It’s going to be difficult to parse out the effects on emerging market currencies between Fed tightening (see this post) from China’s slowdown.

Chinese Growth and Global Growth

I’ll take a slightly different approach – and that is to look at the increments to world GDP under different assumptions. That is, I’ll compare the forecasted increments using the October 2015 IMF World Economic Outlook ([1]) versus those assuming real growth is halved for 2016-2018. These two breakdowns are shown in Figures 1 and 2.

Figure 1: Increments to World GDP in billions of USD, at market exchange rates, from Rest-of-world (blue), US (red) , and China (green). Source: IMF, World Economic Outlook, October 2015 database, and author’s calculations.

Figure 2: Increments to World GDP in billions of USD, at market exchange rates, from Rest-of-world (blue), US (red) , and China (green), assuming Chinese real growth is one-half that forecasted in WEO, but inflation and exchange rate forecasts are unchanged. Source: IMF, World Economic Outlook, October 2015 database, and author’s calculations.

The above mechanical calculations assume no spillover effects, i.e., the Chinese slowdown has no impact on rest-of-world growth. Clearly, if there are multiplier effects, then rest-of-world growth would be lower. This is not indicative of a global recession, but we are in uncharted territory.