Global Economic Weekly

September 16, 2022

Ethan Harris, Head of Global Economics, BofA Global Research

China's slowdown: winners and losers

The Chinese economy has slowed sharply due to several short-term disruptions and structural headwinds. The biggest losers outside Asia are commodity exporters, including Brazil, Chile and the oil producers in the Middle East. The U.S. and a few commodity importers should benefit from lower prices. Mexico could gain market share in exports to the U.S.


China has been impacted by both short-term and structural tailwinds. Short-term factors include China's zero-Covid strategy, deep problems in the property market and a weak labor market (particularly for young workers). Meanwhile unfavorable demographics and a low return on investment after years of rapid infrastructure development pose structural challenges to growth.


The rest of Asia will most likely be hit hard by weaker Chinese growth. What about other parts of the world?


U.S: a mixed bag

Inflation is the main problem facing the U.S. economy at the moment. A weaker China helps lower U.S. inflation via two channels: dollar strength and lower commodity prices. However, any supply disruptions due to Covid-related lockdowns could delay the expected correction in core goods prices. The Chinese slowdown could also strengthen the U.S.'s geopolitical standing and encourage U.S. firms to decouple from China.


Euro area: Russia shock trumps China shock

In "normal" times, weakness in Chinese growth would be an important driver of our Euro area forecasts. Germany would be the most affected because China is an important market for its capital goods exports. The Euro area as a whole would be impacted about half as much as Germany in growth terms. And a capex-driven Chinese slowdown would be roughly twice as painful as a broad economic slowdown. At the moment, however, our outlook for the region is dominated by the impact of the Russia-Ukraine war on natural gas prices and the risk of gas rationing in the winter.


LatAm and EEMEA (Eastern Europe Middle East and Africa): commodities are the main story

There are mixed effects on LatAm from China's slowdown. The major commodity exports should be the biggest losers. These include: i) Brazil, where exports to China account for around 5% of the country's GDP, ii) Chile, which is heavily dependent on copper exports, iii) Peru, which is slightly less exposed because its precious metals exports are less correlated with China, and iv) Colombia and Ecuador, which will be hurt to the extent that China's slowdown leads to lower oil prices.


Meanwhile Mexico stands to benefit significantly from China's deceleration as these two countries compete directly for the U.S. market in manufacturing products. A weaker China could also have positive spillovers for most Central American & Caribbean (CAC) countries, which are net commodity importers.

Shifting attention to EEMEA, for Central and Eastern Europe the war and its impact on the Euro area are much bigger growth drivers than China. Sub-Saharan Africa is a commodity-exporter region, so it will generally be negatively affected by slower Chinese growth. Zambia could be among the hardest hit, while South Africa could be shielded by the breadth of its commodity exports. The Middle East and North Africa also face significant downside from weak Chinese oil demand and lower oil prices.


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