When China sneezes who catches the cold?
Since the early 2000’s, China has grown into one of the world’s two main growth engines, along with the United States. This situation intensified during the global financial crisis and has remained unaltered in recent years. Therefore, any slowdown or economic turmoil in China has dramatic consequences worldwide. The recent lackluster situation in China’s property sector and less robust infrastructure spending at regional levels due to financial constraints have reduced demand for commodities. This situation has exerted further downward pressure on prices and hit growth among commodity-export-driven nations. Developed countries are also feeling the pain of weaker growth in China mainly due to lower purchases of consumer goods, including luxury items. Nevertheless, it is worth highlighting that China is now in a soft patch, which means weaker growth, but not declining economic activity (at least not for now).
The countries most affected by the slowdown in China will be those that have an open economy and are heavily exposed to the world's second-largest economy. Within this context, one of the most affected economies is China’s neighbor Mongolia. The country had been one of the fastest growing economies from 2010 until early this year, but in Q2 Mongolia expanded a meagre 2.2%. This was mainly the result of China’s falling imports of minerals, which plummeted on average in Q2 and Q3 by nearly 30%. Although to a lesser extent, this situation is similar to what happened in Hong Kong, Korea, Malaysia and Taiwan, which all recorded multi-year falls in shipments to China partially due to lower demand from the world’s second-largest economy. To illustrate the impact of the recent slowdown in China on the Asian economies, FocusEconomics panelists cut 2.0 percentage points from Taiwan’s economic outlook and they now expect the island nation’s economy to expand only 1.5% in 2015.
Another spillover of the slowdown in China and, more recently, this summer’s turmoil in the equity market, is that the Chinese are spending less overseas. The consequences of this decline are most evident in Hong Kong, where retail sales have deteriorated markedly in recent months. It’s also fair to add that the nations that are feeling the brunt of China’s weakening economic growth are precisely the ones that benefited the most during the boom years. Conversely, the countries that are weathering the storm from China better are those with a stronger domestic market and which are less reliant on exports. One example is India.
India is in a better position to withstand China’s slowdown than many of its regional peers simply because it isn’t an export powerhouse. India’s economic growth is driven by domestic demand, which is expected to remain resilient in the near future. Consumption, although performing below potential, will be supported by slowing inflation (which has almost halved from 2013 to 2015) and the low commodity price environment should benefit Indian firms and the country’s current account deficit. Moreover, Indian businesses are not highly integrated with the Chinese economy; exports account for a relatively-small portion of GDP and Indian exports to a diverse market with China accounting for around 5%. That being said, a significant slowdown in China would impact India through general capital outflows from emerging markets and a broader global trade slowdown, especially one that ripples throughout Asia.
The key area for India to address to fuel future growth is implementing meaningful economic reforms. Although Prime Minister Narendra Modi was elected on a campaign chock full of ambitious reforms and a plan to foster foreign investment, the government has yet to deliver on many of its key promises. Easing labor market rigidities, simplifying tax procedures and reforming land acquisition laws are all key changes that would encourage investment and improve the business climate. In addition, improving the country’s infrastructure, which is poor, revitalizing credit growth and addressing the banking sector’s vulnerabilities are all steps that can help support the economy’s momentum.
In 1990, 12 years after Deng Xiaoping and the Communist Party of China started a gradual but steady reform of the economy, China’s nominal GDP was around 400 billion and the country was struggling to enter in the world’s top ten largest economies. 25 years later, China has become a global economic power with a nominal GDP of nearly USD 11 trillion, while ranking second only to the United States. The emergence of China has had vast consequences for the global economy. In particular, this situation has been enormously positive for China’s neighboring Asian countries, which benefited from the years of economic boom in China and rising demand. Nevertheless, the current slowdown is threatening to destabilize some countries in the region. While it is true that some countries are less exposed to fluctuations in the China’s economy, in general, the region has become extremely dependent to economic developments in the world’s second-largest economy due to an increasing regional integration. Therefore, instead of asking who is catching the cold when China sneezes, now it is more appropriate to say, “who is not going to the hospital when China appears to be sick?”
Author: Ricard Torné, Head of Economic Research
Date: November 9, 2015
TagsAfrica Economic Growth (GDP) Turkey China Colombia Brazil Unemployment rate Latin America Nordic Economies Investment Italy Precious Metals Commodities Trade United States Canada Agricultural Commodities Base Metals Commodities India precious metals Venezuela Commodities MENA Eastern Europe Company News Banking Sector Iran Australia Financial Sector France Germany Major Economies Russia Euro Area Argentina Ukraine Greece Housing Market oil prices Panelists World Bank NAFTA UK G7 Vietnam Portugal Oil Exchange Rate Inflation Asia Mexico Forex South Africa OPEC Spain Energy Commodities Emerging Markets USA Tunisia Infographic Fed Sub-Saharan Africa Brexit IMF Gold Japan Industrial Metals Commodities Consensus Forecast European Union
1 hour ago
2 hours ago
2 hours ago
3 hours ago
3 hours ago
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- Is the UK really "shackled to a corpse"?
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- Gold: The Most Precious of Metals (Part 3)
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- 2017 & 2018 Economic Outlook for the Top Oil Producing Countries
- Which countries will have the highest and lowest inflation in 2017?
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- 4 Key European Elections That Will Impact the Economy in 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit