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The economy & your investments
Join our Chief Economist and Chief Investment Officer as they discuss the global economy, inflation, interest rates, and the investment landscape.
The reason for China's centrality is mostly explained by the underperformance of its economy. The reopening of the Chinese economy, after two years of stringent mobility restrictions, was awaited with great expectation. It would provide a healthy boost to the global economy at a time when both Europe and the US were expected to fall into recession.
The reality was quite different: both the US and Europe performed better than expected, while Chinese economic growth has been lacklustre. Concretely, all drivers of growth (C+I+G+X-M) a showing signs of deceleration: consumer confidence and retail sales are weak (C), the real estate property crisis is weighing on fixed investment (I), the fiscal policy stance of the government is contractionary (G) and exports (X) and imports (M) are declining at a double-digit rate due to lower international demand for goods. As a result, growth forecasts have been consistently revised down since March.
Analysts point to five elements that explain the poor performance:
The housing sector crisis is the main driver of the current economic slowdown. China's construction and property-related activities account for 25% of GDP (the US peaked at 17.6% during the 2008 GFC). So a major slowdown in this sector will have a severe impact on overall growth. Year-to-date, housing starts are down 24.7%. Although we expect the CCP to intervene to prevent larger developers from defaulting, Chinese GDP growth will be severely impaired.
The spillover effects to other economies are transmitted through three channels: the trade channel, the commodity prices/ inflation channel and the financial channel.
The euro area, although to a lesser extent than SEA, will also be negatively affected by lower Chinese demand (a 1% negative shock leads to a contraction of -0.12% in the EA). From EA countries, Germany will be the most affected.
Finally, Japan, the UK and the US have even milder spillover effects from a weaker China. This is because China is not a major destination for their exports.
I do not want this article to give the impression that China is collapsing. Although the 7% growth rates that we saw a few years ago seem to be gone, it is likely that 3% - 4% will be the new normal, which, given the size of China, will still account for around 20% of global economic growth each year.
China has managed to transform itself from a low-income, low-skill, low-economic complexity exporter to a middle-income, high-skill, high-complexity exporter. China is at the forefront of XXI-century industries such as AI, electric vehicles and solar panels (see charts). The transformation of China's economic structure will not be painless, but a prosperous future remains on the horizon.
Santiago Rossi, Senior Economist
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