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After China devalued the yuan this week, we look at the potential implications for the world economy. We simulate an "other things equal" 10% yuan depreciation against the US$ on our Global Economic Model. It has a small positive effect on Chinese GDP, but is deflationary for other countries. Other things are not exactly equal of course, and we also provide a reminder of the more powerful simulated impact on the global economy of a sharp China slowdown to 4.4% growth over the medium term.
The "naïve" simulation of a 10% RMB depreciation (holding other things constant) would reduce inflation in some countries (the German CPI is 0.3pp lower by 2017). The Fed would most likely delay its first rate hike beyond September and global bond yields would remain lower for longer. There are some negative output implications, particularly for China's competitors in Asia. The global recovery would be a bit slower than we currently forecast, with growth of 2.9% in 2016 rather than 3%.
Other things are not equal of course, and in the context of the broader Chinese slowdown, the impact is much stronger. In such a case, our modelling work suggests Fed tightening would be delayed and slower, with US 10-year yields dropping back below 2% in 2016-17.
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