Behind The Headline: In a rapidly evolving world where economics and geopolitics are inextricably intertwined, the recent economic deceleration in China serves as a stark reminder of the profound impact that shifts in global economic dynamics can have on the geopolitical landscape. While discussions about economic growth and trade may not always make headlines, they lie at the heart of international relations and can significantly influence global conflict and cooperation.
The economic fortunes of nations, especially economic giants like China and the United States, are not just matters of fiscal policy; they are geopolitical game-changers that can reshape the world order. In this context, the concerns surrounding China’s economic slowdown carry far-reaching implications that reach well beyond the realm of finance and underscore the critical relationship between economics and geopolitics in today’s interconnected world.
I encourage you to delve into the complex web of economic factors, trade relationships, and global interdependencies that make understanding China’s economic situation crucial not only for economists but for anyone interested in the broader issues of international power, conflict, and cooperation.
Background: The United States has managed to evade a widely anticipated recession thus far, but the recent economic deceleration in China has raised concerns about potential headwinds for the resilient U.S. economy, according to economists at EY.
New data released on Tuesday revealed that China’s service sector activity had reached an eight-month low in August. Despite growing optimism about a “soft landing” for the U.S., the downturn in the world’s second-largest economy has emerged as a top risk to the global economic landscape, as noted by EY’s chief economist, Greg Daco, and senior economist, Lydia Boussour.
China’s economic trajectory has been the subject of close scrutiny, particularly after decades of rapid growth. In 2022, China’s annual economic growth rate dropped to a mere 2%, its lowest point since 1976. Expectations were high for a rebound in 2023 as COVID-19 restrictions were anticipated to ease. However, the pace of reopening has been slower than initially projected.
What They Are Saying: In a statement, Daco and Boussour stated, “While there is growing optimism about a ‘soft landing’ for the US economy, global challenges still cloud the horizon with China’s economic turmoil emerging as a top risk. Economic activity in China has weakened significantly in recent months and stress in the property sector has resurfaced, posing downside risks to the macro and business outlook.”
During the second quarter of the year, China’s GDP expanded at a 6.3% annual rate, falling short of Wall Street’s predictions due to a decline in property investment and dwindling consumer confidence. This weaker-than-expected growth prompted many Wall Street firms to revise down their growth forecasts for the year.
Wells Fargo’s chief economist, Jay Bryson, stated, “The estimated effects on GDP growth rates in the Eurozone and Japan are a bit larger, but by no means would we characterize them as significant.”
Looking Ahead: Although China plays a significant role in global trade, its impact on the U.S. economy is somewhat limited, in terms of trade exposure. Wells Fargo conducted recent research that suggested a “hard landing” scenario in China, characterized by substantial economic slowdown, would only have a “modest” impact on U.S. growth. Using a model developed by Oxford Economics, Wells Fargo predicted a flat growth rate for the Chinese economy in 2024, followed by a 2.6% contraction in 2025, and a rebound to 2.7% annual growth in 2026.
According to Wells Fargo’s analysis, this notable “growth shock” in the Chinese economy would only result in a reduction of U.S. GDP by 0.1 percentage points in 2024 and 0.2 percentage points in 2025.
EY’s team of economists similarly acknowledged that the direct trade exposure of the U.S. economy to China is relatively small. However, they cautioned that “a potential tightening in global financial conditions associated with a ‘China growth scare’ would significantly magnify the impact.”
What This Means For YOU: The tightening of financial conditions could set off a chain reaction in which declining stock prices lead to surging bond yields, contributing to market volatility amidst weakened business and consumer confidence. This typically prompts consumers to prioritize savings over spending, resulting in a slowdown in economic growth.
EY’s economists emphasized that, for now, the U.S. economy continues to exhibit resilience. Nevertheless, they expressed concern that economic activity could become increasingly sensitive to external shocks as domestic demand wanes, providing less of a growth buffer.
In summary, the recent economic slowdown in China has raised concerns about potential challenges for the U.S. economy. While the U.S. has avoided a recession so far, the weakening economic activity in China poses a risk, albeit a modest one, to U.S. growth. The direct trade exposure between the two countries is limited, but a significant slowdown in China could lead to global financial tightening, affecting stock prices, bond yields, and consumer confidence. This, in turn, could result in a slowdown in U.S. economic growth. While the U.S. economy remains resilient for now, vigilance and monitoring of global economic conditions are crucial to gauge any potential impact on the U.S. economy.