A worker wearing PPE walks down an empty street in Shanghai on May 18.
HECTOR RETAMAL/AFP via Getty Images.
The effects of China’s economic slowdown are spreading globally and resulting in various winners and losers, BofA says.
A weaker China, BofA said, helps lower US inflation via a strong dollar but could also spur supply snags.
Meanwhile, some commodity exporters in Latin America are taking a hit from China’s slowdown.
China’s economic growth is sputtering, and its effects have rippled into the rest of the global economy with mixed results.
According to a Bank of America note to clients, China is facing headwinds that will set the tone for the US, Europe and Latin America as they respond to currency and commodities markets.
“Short-term factors include China’s zero-Covid strategy, deep problems in the property market and a weak labor market (particularly for young workers),” BofA analysts wrote Friday. “Meanwhile, unfavorable demographics and a low return on investment after years of rapid infrastructure development pose structural challenges to growth.”
US
China’s economic weakness presents both good and bad news for the US. On the positive side, China’s yuan has weakened about 8% against the dollar over the past year on aggressive Fed rate hikes and expectations the US economy will outperform others around the world.
That will help ease inflation in the US, as research shows that a 10% appreciation in the dollar lowers personal consumption expenditures inflation by about 0.4 percentage points, BofA said.
BofA Global Research
However, China’s COVID-19 lockdowns could weigh on US markets via supply-chain disruptions. Shipments to the US have declined to their lowest level since June last year, possibly signaling fresh supply issues, BofA noted, which could add pressure on US goods 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,” according to Bank of America. “While concrete steps have been taken in some sectors, the aggregate trade data do not show clear signs of decoupling.”
Europe
China mainly impacts Europe through demand for its exports and commodity prices. Should China ease lockdowns, it could contribute to the easing of supply bottlenecks in Europe and reduce price pressure on non-energy goods, BofA explained.
But China will “contribute considerably less to the outlook risk balance than they usually would,” the analysts said, with a recession on the horizon due to the worsening energy crisis.
“In the current backdrop, the marginal impact of the China slowdown on [Central and Eastern Europe] GDP is likely limited, as Europe is already facing the risks of production cutbacks due to gas rationing in the winter.”
Latin America
The region has significant exposure to China, with Chile sending 40% of its total exports there while Brazil and Peru send about 30% of their totals.
In the note, analysts said the Brazilian economy faces a mixed outlook due to China’s slowing growth.
“On the positive side, lower commodity prices are helping inflation to slow down this year from a peak around 12% to 6.5% by year-end,” BofA said. “On the negative side, they affect Brazil’s fiscal position and trade balance. Therefore, the lower growth in China is negatively impacting Brazilian exports and growth – recall that China represents almost a third of Brazilian total exports, the equivalent of around 5% of the country’s GDP.”
Since 2020, Brazil’s exports to China have fallen off sharply, the data shows, and it will need to diversify its exports as China’s demand slips for goods like soybeans, iron ore, oil, and beef.
BofA Global Research
Similarly, Chile must endure China’s far weaker demand for metals like copper, exports of which represent 18% of Chile’s GDP.
“China is Chile’s main trade partner, receiving about 40% of Chile’s goods exports,” BofA said. “Net exports to China represent almost 2.5% of GDP, the biggest share in the region.”
But Mexico seems to be benefitting as it gains market share in US manufacturing imports at the expense of China’s retreat, BofA said.