For one Chinese company that depends on global trade, fears over the worldwide economy have come to pass already. “The global economy is pretty bleak at the moment,” says Luo Dong, the owner of Doyoung, a Beijing-based exporter of frozen seafood and fruit. “This is having a big effect on us. Our clients’ sales are a lot slower than they used to be, and as purchasing power overseas drops, our exports are taking a hit.”
Luo’s observations were echoed on a wider stage last week, when the Paris-based Organisation for Economic Co-operation and Development voiced the fear gripping many economists: that the drop-off in trade, driven by China, may be a harbinger of something more worrying – a global recession.
Days later, Rolls-Royce became the latest British exporter to face what it called “headwinds” from China, joining a slew of others, from carmaker Jaguar Land Rover to luxury brand Burberry. Meanwhile, commodities including platinum and crude oil resumed their decline in value as investors continued to fret about sliding demand for the raw materials of global commerce. Beijing has cut interest rates six times in less than a year and let the yuan slide against the dollar, underlining the sense of alarm about slowing growth.
Official figures show GDP expanding at around 6.9% in the world’s second-largest economy, conveniently in line with the government’s official target of “around 7%”; but outside analysts believe it may be much weaker. “We find these numbers pretty implausible,” says Andrew Brigden of City consultancy Fathom. “China is slowing a lot more markedly than the official figures show.” Fathom’s calculations, based on alternative indicators such as electricity use, suggest GDP growth of 3% or even less.
However, inside China it feels as though sluggish demand from the eurozone, rather than a homegrown problem, is to blame for the deterioration in the economic weather.
Luo, whose company exports to the US, Europe, Middle East and Africa, says exports have roughly halved since last year. “The worst market has been Europe, largely due to exchange rate fluctuations,” he says.
The European Central Bank has deliberately driven down the value of the single currency by implementing quantitative easing. “The other major factor has been labour costs here, which have gone up about a third,” Luo adds.
For the UK, so far, the impact of global trade headwinds has been relatively mild, notwithstanding the tone of alarm from exporters. Lee Hopley, chief economist at the UK manufacturers’ association EEF, says: “It’s something that’s certainly on our members’ radar, and it’s a source of concern.”
FacebookTwitterPinterest Angel Gurría of the OECD: ‘Global trade, which was already growing slowly over the past few years, appears to have stagnated.’ Photograph: Evaristo Sa/AFP/Getty Images
But for a string of other countries, especially those heavily dependent on commodities exports, the result has been economic chaos – and the OECD fears worse may be to come. After the great financial crisis hit in 2008, reports that demand for exports had “fallen off a cliff”, as it was often put at the time, were among the first signals that a deep downturn was under way.
“Global trade, which was already growing slowly over the past few years, appears to have stagnated,” said Angel Gurría, the OECD’s secretary general, presenting its latest economic forecasts and predicting trade growth of around 2% this year. “What happened in the past 50 years whenever there was such a slowdown in trade growth, it was a harbinger of a very sharp turn of the economy for the worse.”
Gurría explained that the recent slowdown in emerging market economies, led by China, had been particularly damaging because it had come at a time when the advanced economies, in particular the eurozone and Japan, were not yet growing at a robust enough pace to drive global growth.
“A further sharp slowdown in emerging market economies is weighing down on activity and trade. At the same time, subdued investment and productivity growth are checking the momentum of the recovery in advanced economies. It’s a double whammy,” Gurría said.
The OECD’s prescription for this malaise is a collective effort by the advanced economies to ramp up investment – helping to boost demand, improve productivity and generate stronger growth. A similar approach was set out by President Barack Obama on Friday, and he is likely to press for more action to prop up domestic demand at this weekend’s G20 meeting in Turkey.
But with Germany and the UK still enthusiastically espousing austerity, any commitment to new investment seems highly unlikely; so economists have been left trying to count the costs of China’s transition from high-speed, export-led growth to a new economic model at a time when demand in other markets is far from booming.
Economist and China-watcher George Magnus reckons the world will avoid recession, but the damage will be severe for economies that have hitched themselves to the Chinese bandwagon in recent years.
“In Africa, exports to China are 12% of total exports, but three-quarters of the exposure is concentrated among five countries: Angola, South Africa, Democratic Republic of Congo, Republic of Congo and Equatorial Guinea,” he said in a recent blogpost. “In Australia, exports to China are a third of total exports. In Latin America, exports to China are about 2% of regional GDP.”
Most of these countries are exporters of coal, oil and minerals, and their struggles coincide with the end of what became known as the “commodities supercycle” – a decade or so in which prices were held aloft by the belief that demand for raw materials would continue rising, as developing economies became the engines of global growth.
FacebookTwitterPinterest Protests in Brazil, which is now in recession. Photograph: Imago/Barcroft Media
Goldman Sachs’s decision to close down its loss-making Bric fund was a symbolic reminder that the days are gone when the economic rise of Brazil, Russia, India and China (the four countries from which the fund drew its name) seemed guaranteed. Indeed, Brazil and Russia are both in recession.
The US Federal Reserve’s plans to raise interest rates from near zero, which many experts now expect to happen next month, could deepen the agony of countries already struggling with plunging currencies and rising borrowing costs. The International Monetary Fund has warned of a flurry of bankruptcies in emerging economies as rates rise.
“A lot of these countries haven’t been helping themselves: Taiwan, Korea; they’ve all been cranking up their own credit growth,” says Russell Jones of Llewellyn Consulting, an economics advisory firm. But he too believes the world should escape a general slump. “I don’t think we’re on the cusp of a major downturn — probably more of the same.”
Simon Evenett of St Gallen University in Switzerland, who collates detailed data for the thinktank Global Trade Alert, offers an alternative explanation for the recent slide in trade volumes. He calculates that about half of the fall, since exports peaked in September last year, has been caused by the commodity price rout; but the rest, rather than evidence of sickly global demand, has resulted from a creeping rise in protectionism.
His analysis suggests the declines have overwhelmingly taken place in just 28 categories of product. “That’s very concentrated; that makes me doubt that it’s a global downturn.” Eight of these categories are commodities; but the rest map closely on to areas where countries have taken protectionist measures.
In the wake of the financial crisis, policymakers from the G20 countries pledged not to resort to the tit-for-tat protectionism that led to collapsing trade volumes in the wake of the Great Crash of 1929, and was ultimately seen as a contributor to the Great Depression. Since then, there has been little sign of anything with the scope of America’s Smoot-Hawley Act of 1930, which slapped import tariffs on more than 800 products.
But Evenett says there has been a flurry of more subtle manoeuvres: restricting public procurement to domestic firms, for example, or quietly tightening regulations to raise the bar against imports. “I think the China story is adding spice to it, but I think there’s more going on here,” he says.
He is concerned that unless action is taken, politicians will continue to throw sand in the wheels of the international trading system. If he’s right, the downturn seen so far may not be sending a warning signal about global demand; instead, it would be best read as a measure of the fragility of globalisation.