- According to BofA, the effects of China’s slowdown are spreading globally, with mixed winners and losers.
- A weakening China would help lower U.S. inflation through a stronger dollar, but could also exacerbate supply stagnation, BofA said.
- Meanwhile, some Latin American commodity exporters have been hit by the slowdown in China.
China’s economic growth is deteriorating rapidly, and its effects are spilling over to the rest of the global economy, with mixed results.
China faces headwinds, setting the tone for the United States, Europe and Latin America as they respond to currency and commodity markets, according to a Bank of America memo to clients.
“Short-term factors include China’s coronavirus-free strategy, serious problems in the property market and a weakening labor market (especially for young workers),” BofA analysts wrote on Friday. “On the other hand, unfavorable demographics and poor returns on investment after years of rapid infrastructure development pose structural challenges to growth.”
The weakness of the Chinese economy brings both good news and bad news for the United States. On the positive side, China’s yuan has depreciated by about 8% against the dollar over the past year on the back of aggressive Fed rate hikes and hopes that the US economy will outperform the rest of the world.
According to the BofA, this would help moderate U.S. inflation, as studies show that a 10% rise in the dollar reduces inflation in consumer spending by about 0.4 percentage points.
However, China’s COVID-19 lockdown could weigh on the US market via supply chain disruptions. Shipments to the US have fallen to their lowest level since June last year, which could signal a new supply problem, which could put pressure on inflation in US commodities, the BofA said. Did.
Meanwhile, a weakening Chinese economy could ultimately help the US distance itself from its geopolitical rivals.
According to Bank of America, “in the United States, bipartisan forces are pushing for secession from China.” “Concrete steps have been taken in some sectors, but aggregate trade data show no clear signs of decoupling.”
China primarily influences Europe through export demand and commodity prices. If China eases its lockdown, it could help ease supply bottlenecks in Europe and reduce price pressures on non-energy goods, BofA explained.
However, with a looming recession due to an aggravating energy crisis, China “will contribute significantly less to the risk balance of the outlook than usual,” analysts said.
“In the current context, the modest impact of the slowdown in China [Central and Eastern Europe] GDP is probably limited as Europe already faces the risk of production cuts from winter gas rationing. “
The region has significant exposure to China, with Chile sending 40% of its total exports to China, and Brazil and Peru about 30% of its total exports.
In a note, analysts say Brazil’s economy faces a mixed outlook as China’s growth slows.
“On the bright side, falling commodity prices are helping to slow inflation this year from a peak of around 12% to 6.5% by the end of the year,” BofA said. “On the downside, they affect Brazil’s financial position and trade balance. Thus, China’s low growth has had a negative impact on Brazil’s exports and growth. China accounts for nearly 3% of Brazil’s total exports. Recall that it accounts for one-third of the country’s GDP.”
Brazil’s exports to China have fallen precipitously since 2020, and with declining Chinese demand for commodities such as soybeans, iron ore, oil and beef, Brazil needs to diversify its exports.
Likewise, Chile has had to withstand much weaker Chinese demand for metals like copper, with copper exports accounting for 18% of Chile’s GDP.
“China is Chile’s main trading partner, receiving about 40% of Chile’s merchandise exports,” BofA said. “Net exports to China represent almost 2.5% of GDP, the largest share in the region.”
But Mexico appears to be benefiting as it gains market share in U.S. manufacturing imports at the expense of China’s setback, BofA said.