- The effects of China’s economic slowdown are spreading globally and creating winners and losers, according to BofA.
- A weaker China, BofA said, helps reduce US inflation via a strong dollar, but could also spur supply issues.
- Meanwhile, some Latin American commodity exporters are hurt by China’s slowdown.
China’s economic growth is faltering and its effects have trickled down to the rest of the global economy with mixed results.
Bank of America note to clients says China faces headwinds that will set the tone for the U.S., Europe and Latin America as they react to currency and commodity markets .
“Near-term factors include China’s zero-Covid strategy, deep problems in the housing market and a weak labor market (especially for young workers),” BofA analysts wrote on Friday. “Meanwhile, unfavorable demographics and a weak return on investment after years of rapid infrastructure development pose structural challenges to growth.”
China’s economic weakness presents both good and bad news for the United States. On the positive side, the Chinese yuan has weakened by around 8% against the dollar over the past year due to aggressive Fed rate hikes and expectations that the US economy will outperform others in the world.
This will help dampen inflation in the United States, as research shows that a 10% appreciation of the dollar reduces personal consumption expenditure inflation by about 0.4 percentage points, BofA said.
However, COVID-19 lockdowns in China could weigh on US markets via supply chain disruptions. Shipments to the United States fell to their lowest level since June last year, possibly signaling further supply problems, BofA noted, which could add pressure on goods inflation. in the USA.
Meanwhile, a weaker Chinese economy could help the United States distance itself from its geopolitical rival.
“There is a bipartisan push in the United States to decouple from China,” according to Bank of America. “While concrete steps have been taken in some sectors, aggregate trade data does not show clear signs of decoupling.”
China mainly impacts Europe through the demand for its exports and the prices of raw materials. If China eases lockdowns, it could help ease supply bottlenecks in Europe and reduce price pressure on non-energy goods, BofA said.
But China “will contribute considerably less to the balance of risk to the outlook than it usually would,” analysts said, with a recession on the horizon due to the worsening energy crisis.
“In the current context, the marginal impact of the Chinese slowdown on [Central and Eastern Europe] GDP is likely to be constrained as Europe already faces the risks of reduced production due to winter gas rationing.”
The region is heavily exposed to China, with Chile sending 40% of its total exports there while Brazil and Peru send around 30%.
In the note, analysts said Brazil’s economy faces a mixed outlook due to slowing Chinese growth.
“On the positive side, lower commodity prices are helping inflation slow down this year, falling from a peak of around 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, weaker growth in China has a negative impact on Brazilian exports and growth – remember that China accounts for almost a third of exports Brazil’s total, equivalent to about 5% of the country’s GDP.”
Since 2020, Brazil’s exports to China have fallen sharply, the data shows, and it will need to diversify its exports as Chinese demand drops for products like soybeans, iron ore, oil and beef.
Similarly, Chile has to endure much weaker demand from China for metals like copper, whose exports account for 18% of Chilean GDP.
“China is Chile’s largest trading partner, receiving around 40% of Chile’s merchandise exports,” BofA said. “Net exports to China are nearly 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 retreat, BofA said.