Despite successfully dodging the widely-predicted recession, the United States now faces a looming threat to its resilient economic performance as China’s economic slowdown comes into focus. Recent data released on Tuesday revealed that China’s service sector activity plunged to an eight-month low in August, raising concerns about its potential impact on the US economy.
“While there is growing optimism about a ‘soft landing’ for the US economy, global challenges still cloud the horizon with China’s economic turmoil emerging as a top risk,” warned economists Greg Daco and Lydia Boussour of EY in a note on Tuesday. China’s economic journey has been marked by highs and lows, with its growth rate dwindling to a mere 2% annual rate in 2022, the lowest since 1976. Expectations were high that the post-COVID economic reopening in 2023 would stimulate growth, but the reality has fallen short.
In the second quarter of 2023, the Chinese economy registered a growth rate of 6.3%, disappointing Wall Street’s predictions and leading several firms to revise down their growth projections for the year. Although the US economy maintains limited direct trade exposure to China, economists caution that a tightening of global financial conditions could exacerbate the repercussions of China’s economic slowdown. This potential scenario could trigger a chain reaction, with falling stock prices and rising bond yields denting business and consumer confidence, ultimately curbing spending.
For the time being, the US economy continues to exhibit resilience. However, the economists at EY have sounded a note of caution, emphasizing that economic trends might become more sensitive to global shocks in the coming months as domestic demand weakens. Wells Fargo researchers have conducted a comprehensive analysis, concluding that a “hard landing” for China’s economy would have only a “modest” effect on US GDP growth in 2024 and 2025. According to their projections, US GDP could decrease by 0.1 percentage points in 2024 and 0.2 percentage points in 2025 if the Chinese slowdown persists.
The true extent of China’s recent economic deceleration and its repercussions on the US and global economies remains to be seen. While the direct impact on the US economy may be relatively small, the potential secondary effects on the world stage could be far more substantial. The intertwined nature of the global economy underscores the importance of closely monitoring China’s economic trajectory and taking precautionary measures to shield the US from any adverse consequences.
In response to the concerning data from China, the Biden administration has affirmed its commitment to maintaining a watchful eye on global economic developments and implementing policies aimed at safeguarding the US economy. Treasury Secretary, Sarah Rodriguez, stated, “We are well aware of the challenges posed by the evolving global economic landscape. Our focus remains on strengthening the domestic economy while actively engaging in international cooperation to address these challenges.”
As both economic giants, the US and China remain inextricably linked, and the ripple effects of China’s economic slowdown could reverberate far beyond their respective borders. The coming months will prove crucial in determining the trajectory of both nations’ economies and the wider global financial landscape.
Source: Yahoo Finance
