Wishing the Chinese economy well…for our sake.

We started this week asking what impact you think China’s slowing economy will have, if any, on your business. I am sure that some people thought there would be no impact as they do not sell in China or work with Chinese companies. In our industry some might have felt it is positive as a number of imported goods come from Chinese origin and a slowing income might put price pressure on the goods resulting in a value for the purchasing company. Perhaps unless you were a net exporter to China you did not see or feel that there is any risk to your company as a whole. If you thought this, you are likely wrong.

China is now the third largest economy in the World behind the European Union and the United States. China supported 13.8% industrial growth in 2011 which far exceeds any other G20 country (Germany was second at 8%). Their economic growth or GDP rate of 9.2% also blew past other large economies like Germany (3.1%), Canada (2.5%) and the United States at (1.7%)[i].  Their size and growth has had many say that they kept the recession from becoming a true depression. China is a huge consumer of natural resources such as oil, wood products and minerals becoming a huge net importer. These industries and resources are driving many economies like Canada, Russia, Sweden, United States and Finland directly and indirectly. In some countries these industries are propping up the total economy, such as Canada where other sectors such as manufacturing are still declining. If China does have an economic downturn as many have predicted, then natural resource based economies like Canada will see a large decline in this sector. This impact will trickle throughout the Canadian economy and see housing markets slow and values decline, services sectors would then have reduced financial resources and face similar short comings. Canada which many have shown as a “best example” of a well-managed economy could fall greater than other G8 countries did during the original or double dip recession. The one sector that might benefit in Canada would be manufacturing. As resources decline so would the Canadian dollar and create a new competitive advantage as the labour component would become much more competitive.

If you are in manufacturing and feel this might solve some of your issues, the problem could be more complex as well. As demand slows within China, Chinese producers will be promoting their product internationally at a higher rate. This new abundance of low cost product would put increased pressures on manufacturers as they faced greater price pressures and tighter margins.

China is looking adding a stimulus packages to boost their economic outlook, but as the United States has shown these offer short term remedies at best.  With the United States and the European Union still spinning their wheels to gain some footing in the economy, having China start to fall should be worrying for all including traditional insulated segments like oil and gas and mining. The question remains, can the drop be slowed or stopped in time for the World economy to be stable enough to sustain the pressures of another economic giant stumbling?

There are some that believe China’s economy will recover soon like Wayne Swan the Australian treasurer and China Daily who is predicting as early as Q4 2012. I personally hope so because a decline economy may not seem scary to you but it scares the heck out of me.

Cheers,

Lorne