China is slowing and could drag the world economy down with it

Apple ChinaAP/Eugene Hoshiko

  • China’s economy is slowing, possibly even more so than officials have led on.
  • A worse-than-expected decline could send global economic growth to its lowest level in a decade.
  • Slowing US growth and trade tensions could worsen the world economic outlook.

The second-largest economy is slowing, and it could take global growth down with it.

Weaker than expected data has been pouring out of China left and right in recent months, with the economy growing at its slowest pace in nearly three decades in 2018. And many suspect things could be even worse than officials have led on.

“The Chinese slowdown could have serious negative consequences for world growth if it intensifies,” economists at Oxford Economics said in a research note out Tuesday. They said global economic growth could slow to 2.3% in 2019 if conditions worsen, marking the lowest level in more than a decade and a pace not seen since the financial crisis.

For industrial sectors around the world, risks are especially apparent. China’s factory activity, which is already at its lowest in more than two years, is expected to shrink for a second straight month in January.

That means the global manufacturing PMI could slip to the 2016 low of 50.7 from 51.5, the economists said, implying a world growth rate of around 2.5%. They see a drop to below 50 as possible if conditions worsen, which would indicate a contraction in global manufacturing output. In 2018, the global economy expanded at a rate of 3.1%.

A simultaneous slowdown in the US, the largest economy, could dim the world outlook further. An increasing number of economists forecast the US could enter a recession by 2020.

“The global slowdown would be worse still in the event of a combined negative shock to Chinese and US GDP,” they said.

Consensus expectations for growth are less dismal, but have been declining in recent weeks. This month, the International Monetary Fund cut its global growth forecast for 2019 by 0.2 percentage points to 3.5%.

“As seen in 2015-16, concerns about the health of China’s economy can trigger abrupt, wide-reaching sell-offs in financial and commodity markets that place its trading partners, commodity exporters, and other emerging markets under pressure,” the international lender said.

Asian trading partners with close industrial links to China and emerging markets would be hit the hardest by a hard landing in the second-largest economy, the Oxford economists said. However, the rest of the world wouldn’t be insulated from risk.

Caterpillar and Nvidia on Monday joined a string of international companies sounding the alarm on China, citing the slowdown as they posted weaker-than-expected earnings and outlooks. Apple, Samsung, Starbucks, HP and Daimler have issued similar warnings recently.

Hundreds of billions of dollars worth of import tariffs levied between the US and China have only added to concerns as they threaten to further stall activity in the largest economies.

“China’s imports from the US have collapsed,” said Mark Williams, chief Asia economist at Capital Economics. “Chinese firms may also have cut back on orders of imported parts and components before the early-December truce between Presidents Xi and Trump removed the immediate threat of a tariff escalation and consequent decline in US demand.”

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