China’s downturn will create winners and losers in the global economy: Euromonitor International

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• China’s weaker B2B and private consumption growth will impact exporters and retailers
• Raw material exporters were particularly hard hit in Latin America and Australia
• Lower manufacturing costs in China to reduce prices worldwide
• Europe is expected to benefit from reduced competition in global energy and natural gas markets

LONDON, United Kingdom – China’s slowdown and deflation will create winners and losers in the global economy, market research firm Euromonitor International has found.

Lan Ha, head of economic research at Euromonitor International, said China’s economic recovery from the pandemic was slowing due to falling demand for the country’s exports and sluggish growth in domestic consumption.

Projected growth rates for China in 2023-24 are higher than the 3.0% growth the country recorded in 2022. However, a growth rate of about 5.0% is significantly lower than the economy’s pre-pandemic trend, which averaged 7.7% per year in 2010. 2019.

To stimulate the economy, the People’s Bank of China cut interest rates in June and August 2023. However, to stimulate economic growth, additional fiscal stimulus in the form of tax breaks or incentives for manufacturers is likely to be required.

Ha added that ongoing problems in the real estate market are raising concerns about the stability of China’s financial system and risking a deeper downturn for the world’s second-largest economy. This threatened to have a significant impact on the global economy with a significant impact on businesses and consumers.

“After a dynamic post-pandemic recovery at the beginning of the year, China’s economic growth began to slow in the second quarter of 2023. Exports, once a consistent engine of growth, are now struggling. China’s exports fell 14.5% in July 2023 – the fastest decline since the Covid-19 outbreak. Weaker global demand and rising geopolitical tensions are hurting Chinese exporters,” Ha said.

“On the domestic consumption side, ongoing housing market problems are dampening investment, while consumer spending is weakening as Chinese consumers become more cautious about jobs, income and economic prospects. Falling consumer demand also caused consumer prices to fall into deflationary territory, a typical sign of a weakening economy.”

Justinas Liuima, industrial insights manager at Euromonitor International, said that in China’s case, deflation could worsen the country’s debt burden as the real value of debt rises as prices fall. As a result, China’s enterprises and local governments must devote more financial resources to servicing debt, leaving fewer resources for spending and investment. According to the Bank for International Settlements, China’s private and public debt burden is already high, reaching nearly three times domestic GDP in 2022, exceeding the US debt level.

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Although China’s deflation is likely to be temporary due to base effects and a rise in core inflation, deflationary pressures are significant. The ultimate challenge for Chinese authorities will be to find a way to stop the self-propelling spiral of lower prices, weaker demand, lower production and higher unemployment, Liuima added.

China’s economic slowdown and the risk of deflation will impact the global economy and businesses

While a slowdown in China’s economy will lead to slower growth in the global economy overall, the impact on different economies and companies will be different. On the negative side, weaker B2B and private consumption growth will hit exporters to China and retailers in the country.

Liuima said China is one of the largest consumers of machinery, high-tech goods and luxury goods. Additionally, slower growth in China will negatively impact commodity exporters, particularly Latin American countries and Australia.

“Higher costs of imported goods have been one of the reasons for higher inflation globally, and lower prices for manufactured goods in China may help ease price pressures.”

“Slower economic growth in China could also benefit Europe as it will reduce competition in global energy and particularly natural gas markets. European countries are particularly vulnerable to natural gas price shocks and lower prices can help ease energy price pressures.

“There are also fears that falling prices of Chinese goods will increase competition and hurt foreign companies. However, this is unlikely to lead to significant changes in the global competitive landscape in the medium term as it will require a prolonged period of deflation and currency devaluation to feel the impact.”

For more insights into China and the global economic outlook, click here.