Global Powers Heading in the Wrong Direction

China has made it to several headlines lately.  For instance, President Biden had a highly anticipated call with China’s President Xi Jinping.  And then there was this week’s visit from the Speaker of the House, Nancy Pelosi, to Taiwan.  Worries about geopolitical instability were top of mind for many pundits covering this story.  Unfortunately, it might be China’s economic instability that is the real news, news the second-largest economy may not want widely known.

July was a difficult month for the globe’s manufacturing hub.  Their factory output unexpectedly contracted in the period. The nation’s National Bureau of Statistics of China produces a purchasing managers index which is similar to that created by the Institute for Supply Management here in America.  It is a diffusion index which means two things: 1) it is an opinion survey and not actual hard data; 2) it is calibrated such that readings below 50.0 indicate economic contraction.

For China a manufacturing contraction is troublesome enough on its own, but the nation has an ongoing real estate challenge to boot.  Property values there fell for a 10^th consecutive month in June.  Transaction volume is declining too, falling 23 percent in June after a 42 percent drop in May.  Of course, this could be echoes of their recent Covid-19 lockdowns.

Worries about China don’t exist in a vacuum.  Calls for a global slowdown are growing stronger.  America’s economy is hardly firing on all cylinders (e.g., two consecutive quarters of negative GDP growth).  Adding to the difficulties of these two largest single-nation economies is a European Union struggling and an ongoing war in Ukraine, likely suggesting the second half of this year may have some difficulties lying ahead.  Just last week the International Monetary Fund downgraded their estimates for global economic growth to 3.2 percent this year and 2.9 percent next.  In their July 2022 World Economic Outlook (click here to see it) they add to a growing list of concerns that tighter financial conditions could cause disorder as central banks continue tightening policy to combat inflation, and the threat of Russia stopping gas flows to Europe by the end of this year.  Rarely if ever does the worst-case scenario of every major variable play out, but it won’t take many of them to see things worsen further before the next inevitable recovery.