- The impact of China’s economic slowdown is spreading globally, resulting in various winners and losers, according to BofA.
- A weaker China, BofA said, is helping lower US inflation from a strong dollar, but could also cause supply shortages.
- Meanwhile, some commodity exporters in Latin America are suffering from the slowdown in China.
China’s economic growth is faltering, and its impact has spilled over to the rest of the world economy with mixed results.
China is facing headwinds that will set the tone for the US, Europe and Latin America as they react to FX and commodity markets, Bank of America said in a note to clients.
“Near-term factors include China’s zero-Covid strategy, deep problems in the real estate market and a weak labor market (particularly for young workers),” BofA analysts wrote on Friday. “Meanwhile, unfavorable demographics and a low return on investment after years of rapid infrastructure build-out pose structural challenges to growth.”
China’s economic weakness is both good and bad news for the US. On the plus side, the Chinese yuan has depreciated about 8% against the dollar over the past year on the back of aggressive Fed rate hikes and expectations that the US economy will outperform others around the world.
This will help ease U.S. inflation, as research shows that a 10% appreciation in the dollar reduces personal consumption spending inflation by about 0.4 percentage point, BofA said.
However, China’s COVID-19 lockdowns could weigh on US markets with supply chain disruptions. Shipments to the U.S. have fallen to their lowest level since June last year, which BofA said may indicate fresh supply problems that could increase pressure on U.S. commodity inflation.
Meanwhile, a weaker Chinese economy could help the US eventually distance itself from its geopolitical rival.
“There is a bipartisan push in the US to decouple from China,” Bank of America said. “While concrete steps have been taken in some sectors, the aggregate trade data show no clear signs of decoupling.”
China influences Europe mainly through demand for its exports and commodity prices. Should China ease lockdowns, it could help alleviate supply shortages in Europe and reduce price pressure on non-energy goods, BofA said.
But China will “do much less risk-balancing than usual,” the analysts said, as a recession looms on the horizon as the energy crisis deepens.
“Against the current backdrop, the slowdown in China is only having a marginal impact [Central and Eastern Europe] GDP is likely to be limited as Europe already faces the risk of production cuts due to winter gas rationing.”
The region has significant exposure to China, with Chile sending 40% of its total exports there, while Brazil and Peru supply about 30% of their total exports.
In the statement, analysts said the Brazilian economy faces a mixed outlook due to slowing growth in China.
“On the plus side, lower commodity prices are helping slow inflation this year from a peak of about 12% to 6.5% by the end of the year,” BofA said. “On the negative side, they affect Brazil’s fiscal position and trade balance. Therefore, slower growth in China is having a negative impact on Brazilian exports and growth – remember that China accounts for almost a third of Brazil’s total exports, which is about 5% of the country’s GDP.”
Since 2020, Brazil’s exports to China have fallen sharply, data shows, and it will need to diversify its exports as China’s demand for commodities like soybeans, iron ore, oil and beef slacks.
Similarly, Chile is suffering far weaker demand from China for metals like copper, whose exports account for 18% of Chile’s GDP.
“China is Chile’s main trading partner and receives about 40% of Chile’s goods exports,” BofA said. “Net exports to China account for almost 2.5% of GDP, the largest share in the region.”
But Mexico appears to be benefiting as it gains market share in US manufactured goods imports at the expense of China’s withdrawal, BofA said.