China's challenge to the global economic recovery

China’s challenge to the global economic recovery

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It has long been said of the United States economy that when the U.S. sneezes, the rest of the world catches pneumonia. With China now being the world’s second largest economy and its primary economic growth engine, one has to wonder whether the same might be said of China.

This comparison is all the more relevant today when the Chinese economic recovery is being challenged by a renewed outbreak of the COVID-19 pandemic at a time that several serious weaknesses cast a dark cloud over that country’s long-run economic outlook.

In the decade following the 2008-2009 Great Recession, China’s impressively rapid economic growth made it the main engine of the world economic recovery. Its rapidly expanding economy provided growing export markets, especially for its Asian neighbors. Meanwhile, its insatiable demand for international commodities provided much needed support to the emerging market economies.

Over the past year, after a brief COVID pause, this pattern seems to have reasserted itself as China was the earliest among the world’s major countries to bring the pandemic under control. That enabled its economy to recover rapidly from its COVID-19 induced recession. Once again this provided growing export markets for its Asian neighbors as well as substantial support to a strong rebound in international commodity prices so beneficial to the emerging market economies.

A recent outbreak of the delta variant in China poses an immediate challenge to its continued role as the world economy’s main growth engine. Several Chinese regions have reimposed economic lockdowns as the Chinese government adopts a zero-tolerance approach to the pandemic. While such an approach is likely to be in the country’s long-term economic interest, it will cause short-term problems for the country’s economic recovery.

Any delta-induced Chinese economic slowdown would be occurring at a time that the country faces serious longer-term economic challenges.

The government’s recent crackdown on its high-tech sector, together with its efforts to give preference to its public sector over its private sector, represents at least a partial reversal of Deng Xiaoping’s economic reforms in the 1980s that underpinned the Chinese economic miracle.

At the same time, slower economic growth will make it more difficult for the Chinese authorities to deal with its credit market bubble, which is among the largest in the world. That, in turn, threatens to replicate in China the Japanese economic slowdown of the 1990s, with a rise in zombie companies and the clogging up of bank balance sheets with non-performing loans.

A Chinese economic slowdown could have serious spillover effects to the rest of the global economy. The U.S. and European economic recoveries are already being hobbled by supply-chain problems in the rest of Asia. China’s Asian neighbors are struggling with their own delta waves, which are inducing them too to lockdown parts of their economies.

Meanwhile, the highly indebted and under-vaccinated emerging market economies are in a weak position to weather a renewed slump in international commodity prices and a contraction in their export markets.

Equally troubling is the risk that a Chinese economic slowdown could burst the global “everything” bubble that now characterizes the world’s equity, housing and debt markets. Those bubbles are premised on the assumption that today’s ultra-low interest rates will last forever, and that the world economy will continue to recover smoothly from its COVID-induced damaged. A prolonged Chinese economic slowdown could throw that assumption into serious question and be the trigger that bursts the bubble.

One upside to a Chinese-induced world economic slowdown is that it would reduce the risk of U.S. economic overheating and inflation from today’s excessively expansive budget and monetary policy stances.

But we would all be better off if China could somehow quickly contain its economically damaging delta wave and if the U.S. addressed the threat of economic overheating by tightening its economic policy.

Desmond Lachman is a senior fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.

U.S. leading indicator points to further economic recovery in July

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The New York Stock Exchange (NYSE) is seen in the financial district of New York, U.S., January 13, 2021. REUTERS/Shannon Stapleton

Aug 19 (Reuters) - A gauge of future U.S. economic activity increased in July, suggesting the economy continued to expand from the recession caused by the coronavirus pandemic even in the face of a resurgence in cases fueled by the Delta variant.

The Conference Board on Thursday said its index of leading economic indicators (LEI) rose 0.9% last month to 116.0. Economists polled by Reuters had expected an increase of 0.8%.

Even though the U.S. economy is forecast to grow this year at its fastest pace since the 1980s, there are signs the recovery could be cooling off. Supply-chain bottlenecks continue to slow manufacturing growth, and consumer sentiment plummeted in early August to a decade-low as Americans gave faltering outlooks on everything from personal finances to inflation and employment. read more

Meanwhile, consumer price increases slowed in July, the Labor Department said last week, but inflation overall remained at a historically high level amid supply-chain disruptions as well as stronger demand for travel-related services. read more

“The U.S. LEI registered another large gain in July, with all components contributing positively,” said Ataman Ozyildirim, the Conference Board’s senior director of economic research. “While the Delta variant and/or rising inflation fears could create headwinds for the U.S. economy in the near term, we expect real GDP (gross domestic product) growth for 2021 to reach 6.0% year-over-year, before easing to a still robust 4.0% growth rate for 2022.”

The LEI’s coincident index, a measure of current economic conditions, rose 0.6% in July after increasing 0.4% in June.

But the lagging index increased 0.6% last month after being unchanged in June and increasing 0.8% in May.

“Even with more moderate growth in the second half of the year, the economy’s momentum remains encouraging with constraints on labor supply easing, a trove of excess savings still waiting to be drawn down, and strong vaccine numbers that will insulate the economy from the worsening health situation more so than prior waves,” said Mahir Rasheed, U.S. economist at Oxford Economics.

Reporting by Evan Sully Editing by Paul Simao

Our Standards: The Thomson Reuters Trust Principles.

Opinion: Here’s what the Delta variant means for the economic recovery

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Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own.

The US economy’s immediate prospects appear inextricably tied to how the wave of infections and hospitalizations set off by the Delta variant of Covid-19 plays out. While it seems unlikely that the variant would become so disruptive that it undermines the recovery, there are mounting reasons to be worried that it may become a significant headwind to near-term economic growth.

Consumers are increasingly nervous about the variant, sparking concerns they will turn more skittish in their spending. Retail sales for July declined, while the University of Michigan’s survey of consumer sentiment pulled back sharply in early August and is now lower than it was during the worst of the pandemic last spring. Spiking inflation isn’t helping consumers' moods. The timing of the slump in sentiment and spending coincides with news stories of overwhelmed hospital systems in Florida and Texas , more serious illness among younger populations, and increasing breakthrough infections among those fully vaccinated.

Businesses have also suddenly become more nervous. According to Moody’s Analytics weekly business confidence index , sentiment had significantly improved this spring when vaccinations ramped up and the pandemic was steadily winding down. But it has gone sideways since mid-June. Businesses' assessment of current conditions has turned particularly soft in the past few weeks, with more survey respondents saying conditions are weakening than those that say they are improving. This is the first time this has happened since the vaccines became widely available.

Businesses' expectations regarding the economy’s prospects for the remainder of this year have also diminished significantly. The number of respondents that say the economy will continue to improve has declined from more than 60% to less than half, and those that say the economy will weaken has increased from near 30% to more than 40%. This hasn’t impacted businesses' hiring and investment decisions yet, according to our survey, but it bears close watching, as the job market and broader economic recovery would be in jeopardy if businesses pull back on hiring and investments.

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