China holds the cards as the world faces a dark economic future

There are ominous signs of a further slowing of global economic activity after disappointing Chinese data and a gloomy assessment of Germany’s outlook added to the concerns about the US.

These are the three powerhouses of the global economy, and China the biggest contributor to global growth over the past decade and a half. The fading of a short-lived post-COVID bounce in China’s economy, the flatlining of Germany’s and the potential implosion in the US if there is no resolution of the negotiations over the debt ceiling, are therefore menacing.

Even if the impasse over the debt ceiling were resolved before the US government defaults on its debts and creates global financial and economic chaos, the Federal Reserve Board’s determination to stamp out US inflation, and the impact of the recent bank collapses on the availability of credit, would throttle the growth rate in the world’s largest economy.

There were hopes that China would help keep the global economy afloat, but Tuesday’s disappointing data says that it is confronting challenges of its own.

The release of economic data for April was supposed to show a massive spike in activity relative to the same period last year, when Shanghai was in the grip of a harsh month-long lockdown.

While at face value the numbers looked solid, they came in well below expectation. The figures revealed a loss of momentum from the first quarter of this year that might force a reluctant Beijing to resort to monetary and fiscal stimulus to rekindle growth.

China’s post-COVID economic bounce has lost steam. Credit: AP

The most disconcerting data point was an increase in the unemployment rate for 16 to 24 year-olds to 20.4 per cent in April, a record high, but consumer spending, industrial production, investment and property market activity came in well below expectations.

Given China’s continuing reliance on exports and therefore demand from the rest of the world, perhaps the less-than-impressive numbers could have been anticipated in the face of a slowing US economy and the impact of the war in Ukraine (among other challenges) in Europe.

European powerhouse Germany is experiencing tighter monetary policy in response to elevated inflation, and the war-related energy shocks have significantly impacted its export-oriented industrial base.

On Tuesday, the International Monetary Fund said the tight financial conditions and the impact of Europe’s big spike in energy costs would weigh on Germany’s growth, with GDP growth this year likely to remain near-zero before edging up to between one and two per cent between 2024 and 2026.

US Treasury secretary Janet Yellen. Even if the US dodges its debt ceiling bullet, its economy faces a worrying future.Credit: Bloomberg

The European Union as a whole is looking for meagre growth of about one per cent this year (it grew about 0.3 per cent in the first quarter), with high inflation rates and tight monetary conditions constraining growth even though energy prices have fallen back from the stratospheric levels they reached last year in the aftermath of Russia’s invasion of Ukraine.

With the US and Europe not decoupling but certainly reducing their economic ties with China, particularly in sectors viewed as economically and geopolitically strategic, there’s no positive in any of the three regions that drive global growth.

Nor is it a positive for the Australian economy, which is reliant on China’s role as the world’s largest manufacturing base to drive demand for Australian resources.

Of particular concern within China’s data was the 5.6 per cent rise in industrial production in April compared to the near-10 per cent forecast by external economists and a 0.3 per cent decline relative to March; the 4.7 per cent growth in fixed asset investment in the first four months compared to the 5.7 per cent forecast and 5.1 per cent first-quarter growth; and retail sales growth that slowed from 0.78 per cent in March to 0.49 per cent. Property-related activity remained subdued at historically low levels.

The IMF was already forecasting a fall in the global economic growth rate from 3.4 per cent to 2.8 per cent this year, with China expected to post GDP growth of 5.2 per cent in line with Beijing’s own targeted growth rate of “around 5 per cent”.

Since the IMF forecasts were issued last month conditions have, if anything, deteriorated.

With inflation rates in advanced economies remaining stubbornly high and forcing tightening of already tight monetary policies, and governments in those economies looking at adopting more conservative fiscal stances after the profligate pandemic years, growth rates are being choked.

The EU is prediction meagre growth in the months ahead. Credit: EPA

While it remains likely that there will be a negotiated solution found to the confrontation between the White House and congressional Republicans over the US debt ceiling, with the potential “X date” or moment of default nearing – it could be as early as June 1 – the uncertainty and risk are already further tightening financial conditions in the US. An actual default would cause almost unimaginable levels of self-inflicted damage.

The deteriorating global outlook is being reflected in the commodity markets that are most sensitive to global demand.

Oil prices have slumped from more than $US87 a barrel to below $US75 a barrel in just over a month, despite OPEC+ production cuts. The copper price, perhaps the metal most sensitive to the state of the global economy, has fallen more than 11 per cent over the same period.

Iron ore, which is more closely tied to China’s economic conditions than global conditions – it is a good barometer of China’s industrial activity – has traded comfortably above $US120 a tonne for most of this year but has slumped below $US110 a tonne in the past few weeks to trade around $US106 a tonne.

Assuming the US can dodge the debt ceiling bullet, whether the global economy can avoid recession or something akin to one is probably dependent on China. The war in Europe and the deadlock in US politics and the continuing high inflation rates in both regions probably means there is little prospect of monetary or fiscal stimulus from those sources.

China’s authorities, constrained by high debt levels and the experience of the financial crisis in 2008, when they unleashed torrents of stimulus that resulted in wasteful, unproductive investment and asset bubbles, have been reluctant to go down that path again.

The implications of the levels of youth unemployment in their major cities for social stability alone, however, might cause the authorities to consider some cautious and targeted monetary and fiscal support for an economy whose momentum appears to have slowed significantly.

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