Remember the Roaring 1990s Before Panicking About China's Slumpby
Airlines, auto makers profit from Chinese economic slump
India, Vietnam and Bangladesh also seen as benefiting
When Japan’s economy downshifted dramatically in the 1990s, the rest of the world managed to do just fine. Now, as China suffers a sustained slowdown, there’s a group of economists who say the same may well happen again.
Sure, global growth already has been clipped by the deterioration in China’s expansion. It is, after all, the world’s second-largest economy, just as Japan was back then.
Yet there are reasons to suspect that all the hand-wringing about China pulling down the rest of the world may be a tad overdone. Just as the country’s slump is producing obvious losers -- commodity exporters being a prime example -- it’s producing winners as well. Airlines, automakers and U.S. consumers are among those making out from the steep decline in prices for energy and other raw materials the China slump has wrought.
And it’s these less-publicized beneficiaries that will help the world withstand a protracted period of sub-par performance by China -- provided, of course, it avoids a hard landing and continues to shift the focus of its economy toward consumers and services and away from investment and exports.
"There will be pain and suffering," said Peter Hooper, a 26-year veteran of the Federal Reserve who is now chief economist for Deutsche Bank Securities in New York. "But as long as the slowdown happens gradually, I don’t think it will be a major problem” for global expansion.
Chinese President Xi Jinping said Nov. 3 that average annual growth should be no less than 6.5 percent in the next five years. That suggests leaders are ready to accept the weakest period of expansion since the economy was opened up more than three decades ago.
Even this goal might prove too ambitious, said Nariman Behravesh, chief economist in Lexington, Massachusetts, for consultant IHS Inc. He sees the annual average at 5.5 percent to 6 percent.
Just as Japan did in the 1990s, China runs a trade surplus and so is a net supplier to the rest of the world rather than a source of demand, said Danny Gabay, a former Bank of England official who is now co-director of Fathom Consulting in London. This means the impact of its deceleration on overall global growth will be much more muted than if the U.S. suddenly downshifted.
And while China’s economy is bigger and more internationally integrated than Japan’s two decades ago, it isn’t projected to undergo as sharp a swoon: Japan suffered a so-called lost decade when growth averaged about 1 percent a year from 1991 through 2000 after its real-estate and stock-market bubbles burst.
Computer simulations by JPMorgan Chase & Co. economists found that a 1 percentage point drop in Chinese growth would knock about half a percentage point off the pace of global expansion, with other emerging markets most affected. The U.S., with exports to China amounting to just about 1 percent of gross domestic product, comes out virtually unscathed as American consumers benefit from lower import prices.
Not everyone is so optimistic. Economist David Levy says the world economy is close to entering a recession led by steep cutbacks in spending by China and other emerging markets.
“The problem is that China has been growing so long with huge over-investment that it needs to slash investment so much," said Levy, who heads the Jerome Levy Forecasting Center LLC in Mount Kisco, New York.
The main impact of China’s slackening economy so far has been on commodity prices, as the Asian nation’s purchases fall well short of suppliers’ projections. The Bloomberg Commodity Index has lost almost 20 percent this year, falling near the lowest level since 1999.
Auto makers are reaping the benefits. The cost to produce the average North American vehicle has dropped by $591 in the last year thanks to falling prices for plastics, steel and other raw materials, according to an analysis by New York-based consultants AlixPartners. This represents a potential windfall of more than $1 billion each for General Motors Co. and its suppliers, and Ford Motor Co. and its suppliers.
What’s particularly unusual, said AlixPartners managing director Mark Wakefield in Detroit, is that costs are declining even though auto sales are strong. Typically such a steep fall would coincide with -- and result from -- a drop in U.S demand.
At Signet Jewelers Ltd., the China slowdown has shown up in lower gold expenses that are flowing through to its bottom line.
"We should continue to expect to see benefits coming in from commodity pricing," Michele Santana, chief financial officer, said in an August 27 conference call after the Hamilton, Bermuda-based company reported an almost 20 percent gain in adjusted earnings per share for the second quarter.
Airlines also prosper as their jet-fuel costs plunge. Deutsche Lufthansa AG, Europe’s second-largest, raised its earnings forecast for 2015 on Oct. 29 after an increase in demand mid-year and the decline in oil prices contributed to a 51 percent surge in third-quarter operating profit. The Cologne, Germany-based company said its fuel expenses this year will total 5.7 billion euros ($6.1 billion), down 1.1 billion euros from last year.
Plummeting oil prices are proving to be a boon to U.S. and European households as well. And that’s translating into more spending. Spanish retail sales rose in September at the fastest annual pace in nine months as cheaper energy prices and falling unemployment buoyed consumers.
In the U.S., Americans are using the savings from lower gasoline prices to eat out more often and spend more on entertainment.
"Right now, there are some very positive things happening from a consumer perspective," Emil Brolick, chief executive officer of Wendy’s Company, said in a Nov. 4 conference call. "You’ve got a declining gasoline prices,” falling unemployment and rising home prices. The Dublin, Ohio-based restaurant chain said North American same-store sales rose 3.1 percent in the third quarter.
The dip in Chinese growth may even produce some winners in Asia, according to Shang-Jin Wei, chief economist at the Asian Development Bank in Manila.
Vietnam and Bangladesh -- the world’s second-largest garment maker -- could gain global market share as companies exit China because of rising costs there. So too might India, which could lure some lower-end manufacturing from its fellow Asian nation, he said.
"India is in a relatively favorable position to weather the ripple effects of a China growth slowdown," said Eswar Prasad, a professor at Cornell University in Ithaca, New York, and former International Monetary Fund official. "Its dependence on exports to China is quite modest, and commodity-price weakness works to India’s advantage."
Central bank Governor Raghuram Rajan already has taken advantage of the drop in inflation from lower imported commodity prices, surprising economists Sept. 29 with a bigger-than-expected half percentage point cut in the benchmark repurchase rate.
"There is a silver lining" from the slowdown in China, IHS’s Behravesh said. "It’s producing winners, particularly in the developed world."