China spooks markets as its economy softens, but should Europe be fearful?

When America sneezes, Europe catches a cold. But when China sneezes?

The popular adage about America is a simple reflection of the fact that in the past that is where global downturns have begun. Think back to the last recession: it was triggered by the US sub-prime banking crisis. But now, while the US remains the world’s largest economy overall and will do for another decade, China is larger in many areas of activity, for example car production. It is also the world’s biggest importer of many commodities, including oil.

And right now, while the US economy has continued to grow strongly, China has slowed, leading to a sharp dip in growth in Europe, notably Germany, the EU’s biggest exporter to China.

So, could this be the first time ever that a global downturn will begin, not in America, but in China?

Start with what we know. We have just seen figures that show the Chinese economy is growing at the slowest quarterly rate since this quarterly series was first published in 1992. However, growth in the April/June period was still 6.2 per cent, pretty high by the standard of the rest of the world.

You have to be careful with Chinese GDP estimates, and if you look at specific industries a rather different picture emerges. Take the car industry: sales were down 14 per cent in the first half of this year compared with 2018. That is partly because of new controls on pollution, leaving dealers with a shortage of new emission-compliant cars and stocks of old ones they had to offload at a discount to rural areas where the new rules did not apply.

But last year was the first since the 1980s when car sales declined, and since this year is almost certainly going to be lower still, you can catch a feeling of caution for consumers as a whole.

To be clear, the Chinese economy is far from falling off a cliff. The housing market is stable, with prices creeping up, and construction reasonably solid. The authorities are seeking ways of keeping growth going. But what may happen is that domestic production will be prioritised rather than imports, an economic nationalism if you will.

That is what is happening in the motor industry and any move calling people to be patriotic and buy Chinese goods rather than imported ones would have big a knock-on effect across the developed world.

There is at the moment not much evidence, motor industry apart, that this is happening. We did have figures on Monday from Eurostat that showed the EU’s deficit in trade with China increased sharply in the first five months of this year compared with last year. Exports were higher than in 2018, and though imports rose by more, there is no sign of a buyer’s strike.

Nor is there much evidence that the Chinese economy is slowing more rapidly than the official numbers suggest. Thus, oil imports so far this year are running up nearly 8 per cent on 2018. That is a good hard indicator that growth is still solid. If you are importing more energy, it means your factories are producing more goods, your people are driving more miles in their cars, and your construction companies are building more homes.

I think the honest answer to the question – will it be a slowdown in China that triggers the next global downturn? – is that we can’t yet know. I think it is still true that while the US keeps growing, the world economy as a whole will also do so. But we are much more vulnerable to a Chinese slowdown than ever before, partly because China is a much more important element of global demand, but also because it will inevitably slow as its population ages and it makes the transition from a fast-growing, investment-led economy to a slower-growing, consumer-led one.

So it is still true that when America sneezes Europe catches a cold, but the real worry comes if America and China were to sneeze at the same time. In that case, Europe (and the rest of the world), would be laid up with pneumonia in intensive care.