The current downturn in China's economy is having a noticeable impact on the global economic landscape, and according to The Economist, this scenario could lead to the risk of a widespread global recession.
Just eight months ago, China's economy was expected to rebound strongly after the end of the "zero-COVID" policy, with hopes that domestic consumption and tourism would surge. However, reality has fallen short of these expectations: GDP growth in the second quarter was just over 3%, instead of the projected 10%. Additionally, deflation is spreading, and cautious policies from the Chinese government, along with the ongoing real estate crisis, have fueled concerns about a prolonged downturn.
As the world’s second-largest economy, any weakness in China significantly affects the global economy. With domestic consumption and investment declining, demand for goods and services from other countries has also dropped. This is particularly challenging for nations whose economies rely heavily on exports to China. China consumes 20% of the world's crude oil and more than 50% of its copper, nickel, and zinc, along with over three-fifths of global iron ore. Thus, as China's real estate market weakens, demand for these resources declines, impacting industries in exporting nations.
Countries like Zambia, where metal exports account for 20% of GDP, or Australia, a major coal and iron ore supplier, are among those hardest hit. Mining giant BHP Group recently reported its lowest profits in three years, highlighting that China’s stimulus measures have not been as effective as anticipated. It's not just developing countries feeling the pinch—Western nations are also affected. Notably, reduced demand from China has been a factor in Germany's economic stagnation. In 2021, the 200 largest companies from the U.S., Europe, and Japan earned 13% of their revenues from China, totaling around $700 billion. For example, Tesla now generates 20% of its revenue from China, while Qualcomm derives up to two-thirds of its sales from the Chinese market.
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While the global impact of China's slowdown is unavoidable, the degree of influence varies across regions. For publicly listed companies in the U.S., Europe, and Japan, exports to China account for only 4-8% of total revenue. Even in Germany, which is heavily reliant on exports, exports to China make up just 4% of its GDP. Therefore, a significant and prolonged downturn in China would be required to have a major impact on these countries.
It is worth noting that China's slowdown is occurring while other parts of the world are performing better than expected. In July, the International Monetary Fund (IMF) raised its global growth forecast, predicting nearly 5% growth for the U.S. From another perspective, China's economic deceleration could benefit global consumers by driving down commodity prices, particularly energy costs.
If China's economy continues to deteriorate sharply, this could have widespread negative effects on the global economy. According to The Economist, global growth could decrease by 0.1% to 0.5% during 2023-2024. The worst-case scenario would be a real estate collapse in China, leading to turbulence in global financial markets. A study by the Bank of England indicates that if China's GDP were to suddenly fall from 7% to -1%, global asset values would suffer, while currencies in developed countries would appreciate as investors seek safer assets.
In such a case, the U.K.'s GDP could drop by up to 1.2%. Although Western financial institutions have limited direct exposure to China, some major banks like HSBC and Standard Chartered, which rely heavily on the Chinese market, would be more severely affected.
Amid its domestic economic struggles, China may adjust its foreign policy, reducing overseas investments and loans to focus on solving internal economic challenges. After becoming the world’s largest creditor in 2017, China has significantly reduced capital outflows in recent times. Notably, these shifts could impact countries involved in the Belt and Road Initiative, which has received substantial Chinese investment in recent years. Nations like Mozambique or Pakistan, which rely heavily on Chinese infrastructure investments, may face new challenges if Beijing scales back these projects.
Clearly, China’s economic slowdown is already affecting the global economy, from resource-exporting countries to Western multinationals. While the current situation has not yet led to a full-blown crisis, a continued decline in China’s economy could bring about more serious global repercussions in the near future.
Source: The Economis
