The next global recession may come with a label that reads "made in China" Morgan Stanley’s Head of EM Ruchir Sharma, says.
As regular readers are no doubt aware, decelerating economic growth in China has been a major drag on worldwide demand and is one of the main reasons why global trade is in the doldrums.
Flagging export growth (June’s "strong" 2.1% showing notwithstanding), a painful transition from an investment-led model to a consumption and services-driven economy, and an industrial production-sapping war on pollution have all conspired to bring the Chinese economic growth engine to a virtual halt, with some independent estimates putting output as low as 3.8% (which would constitute a blistering pace in the West but might as well be 0% if you’re China), far below the "official" headline figure which you can bet will remain at or above the Politburo-mandated 7%.
Here’s Bloomberg with more from Sharma on the "Made In China" recession:
Forget about all the shoes, toys and other exports. China may soon have another thing to offer the world: a recession.
That is the prediction from Ruchir Sharma, head of emerging markets at Morgan Stanley Investment Management, who says a continuation of China’s slowdown in the next years may drag global economic growth below 2 percent, a threshold he views as equivalent to a world recession. It would be the first global slump over the past 50 years without the U.S. contracting.
"The next global recession will be made by China," Sharma, who manages more than $25 billion, said in an interview at Bloomberg’s headquarters in New York. "Over the next couple of years, China is likely to be the biggest source of vulnerability for the global economy."
While China’s growth is slowing, the country’s influence has increased as it became the world’s second-largest economy. China accounted for 38 percent of the global growth last year, up from 23 percent in 2010, according to Morgan Stanley. It’s the world’s largest importer of copper, aluminum and cotton, and the biggest trading partner for countries from Brazil to South Africa.
Yes it is, which explains why, as we noted on Monday evening, commodity producers which levered up in anticipation of a perpetual bid from China are now buried under hundreds of billions in debt amid slumping prices and a global deflationary supply glut.
And while the country’s shifting economic model undercuts global trade, the sharp decline in Chinese stocks poses a threat to the country’s presumed new engine for growth: the consumer.
China’s $6.8 trillion equity market roiled global investors over the last few weeks after a yearlong rally accompanied by record borrowing and surging valuations ended in a bear market.
"What happened in China last week was so significant in that for the first time, you’ve got this sign that something is out of control," Sharma said. "Confidence damage is going to last for a while."
Indeed it will, and as we’ve argued on several occasions of late (here for instance), the equity market sell-off has caused irreparable damage to retail investors' collective psyche, which could well have knock-on effects for consumer spending.
This means that just as the world begins to come to terms with the new Chinese reality wherein shifting priorities and more importantly, shifting demographics (the fabled "Lewis Turning Point"), transfer the burden of economic growth from the industrial sector to the consumer, the propensity for everyday Chinese citizens to spend may be constrained by the psychological effects of watching trillions in margin-fueled paper gains vanish into thin air.
So yes, Mr. Sharma, we agree with your assessment - we only hope you realize how right you are and position your clients accordingly.