China's slowdown and global financial market volatility: Is world growth losing out?

- We investigate how a 1% permanent Chinese GDP shock transmits internationally.
- We condition on alternative configurations of cross-country linkages.
- Following the shock, global growth reduces by 0.23 pp and oil prices by 2.8%.
- We examine the spillover effects of surges in global financial market volatility.
- This shock could translate into lower overall world growth of 0.29 pp.

China's GDP growth slowdown and a surge in global financial market volatility could both adversely affect an already weak global economic recovery. To quantify the global macroeconomic consequences of these shocks, we employ a GVAR model estimated for 26 countries/regions over the period 1981Q1 to 2013Q1. Our results indicate that (i) a one percent permanent negative GDP shock in China (equivalent to a one-off one percent growth shock) could have significant global macroeconomic repercussions, with world growth reducing by 0.23 percentage points in the short-run; and (ii) a surge in global financial market volatility could translate into a fall in world economic growth of around 0.29 percentage points, but it could also have negative short-run impacts on global equity markets, oil prices and long-term interest rates.