Chinese economy loses momentum, will the EU and US follow?

The global economy is losing momentum, but there are clear differences between the blocs. Normally, the international coherence of the economy is high. Every now and then economists argue about whether one bloc can wrestle from the direction of the economy elsewhere. This may be such a time. The Chinese economy is clearly slowing. This is important, because China has been the de facto growth engine of the world economy for years. Will we and the US meet the same fate?

China's retail sales growth was 2,5% yoy in August. That was much lower than expected and also much lower than July's 8,5%. The arrival of the delta variant and the lockdown measures taken by the Chinese government in response have taken a hefty toll. The first picture shows the development of the monthly change in retail sales. Obviously, that's a volatile series and that's why I've depicted a 3-month moving average. It is clear that growth has been declining for several months. I have chosen the scale in such a way that the development of the last few months is clear. As a result, the extremes of last year do fall off the chart.

Private consumption accounts for a slightly smaller share of GDP in China than in our kind of countries, but it remains an important driver of growth.

The production side of the Chinese economy is also weakening, but clearly less than consumption. The rate of industrial production growth slowed from 6,4% yoy in July to 5,3% in August. This difference between the trend in consumption and that in production suggests that the decline is at least partly temporary, because it was caused by the delta variant.

I think the difference between the decline in growth in consumption on the one hand and production on the other is also relevant for us. Our relationship with the Chinese economy is through international trade. Dutch exports to China are not that big and in fact the main influence between the Netherlands and China is via Germany. Our eastern neighbors export many machines to China and the Dutch industry is again an important supplier for the German one. The fact that in China the production side weakens much less than consumption is therefore an advantage. It gives us and others a good chance of avoiding the potentially negative effects of the Chinese slowdown. In other words, hopefully we can disconnect a bit. It goes without saying that everyone in the world will notice if the Chinese economy slows down further and for a long time.

America disconnects
Macro data released this week in the US suggest that the US economy is not currently suffering much from China's cyclical slump. For example, the confidence index compiled by the New York Fed for the manufacturing industry in its district rose from 18,3 in August to 34,3 in September. The underlying components on orders and employment were all green. The latter was not the case for the comparable index of the Fed in Philadelphia. While it rose from 9,4 in August to 30,7 in September, underlying data for order position, employment and investment intentions all fell.

The recovery in the US labor market continues. In the last reported week, 332.000 people still applied for new unemployment benefits, up from 312.000 a week earlier, but the total number of unemployment benefits continues to fall. At the beginning of this year, almost 5,2 million benefits were paid every week, but that has now fallen to 2,7 million. In the last week for which figures were reported, the number fell by 187.000.

Consumer spending is also bouncing nicely in the US. Total retail sales increased by 0,7% month-on-month in August, though they fell by 1,8% in July. These figures are subject to various factors that complicate interpretation. That is why the 'control group' that has been cleaned for disruptive elements is often looked at. Sales of this control group increased by 2,5% month-on-month in August, after a decline of 1,9% in July. The following chart shows retail sales by month (in dollars, annualized). Earlier this year, they rose sharply due to the checks that the new government sent everyone. The high level of turnover that resulted from this cannot be fully sustained, but the decline is limited.

The manufacturing side in the US is also continuing to recover. Manufacturing production was 1,5% higher in August than before the pandemic and more than 6% higher than in August 2020. Again, there is no negative impact from the Chinese slowdown.

US inflation fell slightly in August: 5,3% yoy from 5,4% in July. That fitted in with the argument of those who argue that the rise in inflation is temporary and will fall back. Core inflation fell from 4,3% to 4,0%. The month-on-month increase was also just 0,1% for core inflation. However, I don't think the issue is settled yet. The Cleveland Fed publishes an inflation series that excludes the 8% of goods and services that have risen in price the most. Also the 8% least increased in price of goods and services do not count. This limits the influence of extremes. This so-called 16%-trimmed CPI was 3,2% in August, compared to 3,0% in July.

Unemployment in the Netherlands is rising slightly
Unemployment in our country rose for the first time in 12 months in August: 3,2% against 3,1% in July. Official bodies have been predicting for some time that unemployment will rise or that the decline in the unemployment rate will stop. In August, the CPB forecast an average unemployment rate of 3,4% this year. In order to achieve this, unemployment should rise somewhat in the coming months. That also seems likely now that the NOW scheme is being terminated.

The graph below also shows that the number of unemployment benefits continues to fall. There are now 213.000 of them, clearly less than the 240.000 before the pandemic at the beginning of last year. Of course, the picture here is also distorted by the NOW scheme. Now that this has ended, an increase in the number of unemployment benefits in the coming months is also logical.

Positive on balance
On balance, developments in the global economy are positive. The Chinese economy is weakening, but that seems to be mainly due to the delta variant. Hopefully it's temporary, though we'll have to keep a close eye on policy makers. They seem to have shifted their priorities from sustaining growth to curtailing the power of large corporations and a less unequal income distribution.

Europe and the US appear to be largely able to evade the Chinese growth slowdown. The US data this week in particular has been quite reassuring. Inflation is now also starting to fall. Although the argument has not yet been settled on whether higher inflation will fall further quickly, this is a reassuring development for the Fed and also for the financial markets.

Hans de Jong

Han de Jong is a former chief economist at ABN Amro and now a resident economist at BNR Nieuwsradio, among others. His comments can also be found on Crystalcleareconomics.nl

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