How will China’s economic slowdown affect US companies?

How will China’s economic slowdown affect US companies?

Tesla China
Elon Musk at Tesla’s Shanghai Gigafactory in 2019. STR/AFP via Getty Images

After a dynamic post-epidemic recovery at the beginning of the year, China’s economic growth began to lose steam in the April-June quarter. As for exports, which were once a constant engine of growth, they are now facing difficulties. On the domestic side, persistent problems in the real estate market are discouraging investments, while consumer spending is weakening as Chinese consumers become more cautious about jobs, income and economic prospects.

These negative trends affect economic growth expectations. The Chinese economy is expected to grow by 5.0 percent in 2023 and 4.7 percent in 2024, well below pre-pandemic levels, which averaged 7.7 percent annually between 2010 and 2019.

The Chinese economy could grow more slowly under a more negative scenario. Under the China slowdown scenario prepared by Euromonitor International, which… It assumes a deeper recession in the country’s real estate market along with falling asset prices, weak confidence in the financial system, currency depreciation and high unemployment. China’s real GDP growth could decline by 0.3 to 1.2 percentage points in 2024 and 2025. Relative to the baseline.

In the long term, China is unlikely to return to its pre-pandemic growth path, given its aging population and associated structural demand problems. However, there is an opportunity for more sustainable growth that is not led by a building boom.

How much will China’s economic problems hurt American companies?

All of these trends will directly impact US companies with operations in China. The demand slowdown will affect a wide range of industries, from consumer electronics to automobiles to industrial machinery. As a result, US companies will likely face a slowdown in revenue and profit growth in 2023 and 2024.

The slowdown in industrial production growth in China and the problems facing the country’s real estate sector will directly affect American exporters. For example, the United States is the fourth largest supplier of machinery to China with exports worth $13.5 billion in 2022.

However, the impact of China’s slowdown on the broader US economy is likely to be minimal, at least in the short term. Euromonitor’s China slowdown scenario expects US GDP growth to decline by 0.04 to 0.3 percentage points from the baseline between 2023 and 2025. A slowdown in China could reduce US inflation by about 0.1 percentage point from the baseline in 2023 and 2024, as slower factory price growth in China would make US imports cheaper.

China’s economic slowdown may accelerate the ‘Great Decoupling’ process

A prolonged economic slowdown in China may exacerbate trade tensions between the United States and China. There are concerns that a longer period of deflation and currency depreciation would make Chinese exports more competitive in the United States and other foreign markets, which would subsequently hurt domestic companies.

This is unlikely to cause any major changes in trade in the short term, but long-term risks remain, especially in the United States.The manufacturing sector as a result of increasing competition from China. Rising trade imbalances could also exacerbate tensions between the United States and China and lead to the imposition of new trade tariffs by both sides.

The economic slowdown in China may accelerate the process of US separation from China. According to a sustainability survey by Euromonitor, 71% of North American companies plan to improve supply chain resilience over the next five years, and slowing growth and demand in China will likely accelerate these efforts. Changes in supply chains and trade flows could benefit countries such as India, Vietnam, Thailand and Mexico. These countries could emerge as winners in the decoupling between the United States and China.

The first signs of shifting trade flows are already becoming apparent. Between 2017 and 2022, U.S. imports of electronic components from China declined by 37% while imports from Thailand more than doubled, indicating structural changes in supply chains for critical components. Likewise, auto exports from Mexico rose 28% in 2022, and are likely to grow further as automakers diversify their supply chains and move a portion of production away from China to countries closer to the U.S. market.

However, geopolitical tensions could hurt the growth of US companies, as they increasingly need to comply with stricter technology legislation and regulations at home and in China. Companies in the technology and financial sectors, as well as those that supply critical components such as semiconductors and car batteries, are likely to feel the most pain as industry regulation tightens in the future. These factors pose a particularly significant threat to small and medium-sized companies, which usually have fewer financial, technological and legal resources.

Justinas Liuima is Director of Industrial Research and Consultant at Euromonitor International, a global market research company.

How will China's economic slowdown affect US companies?

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