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--BOE Research Paper Finds Impact Of China Slowdown On UK Was Underestimated
--UK GDP Hit Could Be Large
By David Robinson
     LONDON (MNI) - Work by Bank of England economists finds that a slowdown in
China could hit the UK economy harder than previously estimated, with only a 3%
fall in Chinese GDP lowering the level of UK GDP by up to 0.5%.
     The Bank economists entered Chinese slowdowns into recently updated BOE
global economic models, and found that the hit to the UK was markedly greater
than the BOE had previously thought. They concluded that the hit to the UK was
about 50% greater than previously thought.
     In an article in the BOE's Quarterly Bulletin, Bank economists factored in
not just the UK's low level direct trade links with China but its indirect ones,
through Hong Kong and the European Union, and through exchange rate and asset
price movements.
     "We find that a modest 3% shock to Chinese GDP could reduce the level of UK
GDP by 0.4%-0.5%. A large fraction of this reflects indirect trade links. A
larger, illustrative 'hard landing' in China that reduces the level of Chinese
GDP by 10% could reduce the level of UK GDP by 1.3%-1.4%," the BOE economists
stated.
     Amplification mechanisms, that is exchange rate and asset price moves,
would make the hit much larger, potentially up to double the size, that is
taking 2.6% to 2.8% off the level of UK GDP.
     The article underscores how the UK economic outlook could be derailed by
events abroad. The Bank's current forecasts show UK growth running around
potential, of about 0.4% a quarter, which with the output gap closed points to
monetary tightening ahead.
     A slowdown in China, however, and more notably a hard landing, could be
enough to shake that picture.
     "Looking ahead, China's continued integration into the global economy is
likely to have important implications for the UK economy and the rest of the
world. The UK's indirect trade links with China will probably remain the main
transmission channel from China to the UK," the paper concluded.
--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com
[TOPICS: M$B$$$,M$E$$$,MI$$$$,M$$BE$]
MNI London Bureau | +44 203-865-3812 | les.commons@marketnews.com