How Will China’s Slowing Economy Affect U.S. Businesses?
After a dynamic post-pandemic recovery at the start of the year, China’s economic growth started to lose steam in the April-June quarter. Export, once a consistent growth driver, is now struggling. On the domestic side, ongoing real estate market problems dampen investments, while consumer spending weakens as Chinese consumers become more cautious about job, income and economic prospects.
These negative trends impact economic growth forecasts. China’s economy is forecast to expand by 5.0 percent in 2023 and 4.7 percent in 2024, significantly lower than its pre-pandemic levels, which averaged 7.7 percent annually between 2010 and 2019.
The Chinese economy could grow even slower in a more negative scenario. Under Euromonitor International’s China Slowdown scenario, which assumes a deeper slump in the country’s property market along with declining asset prices, weaker confidence in the financial system, currency depreciation and rising unemployment, China’s real GDP growth could be shaved off 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 trajectory, given its aging population and related structural demand problems. Nevertheless, there is an opportunity for more sustainable growth that is not led by a construction boom.
How badly will China’s economic trouble hurt U.S. companies?
All these trends will directly affect U.S. companies that have operations in the China. Demand slowdown will affect a broad range of industries, from consumer electronics to automotive to industrial machinery. As a result, U.S. companies are likely to face slower revenue and profits growth in 2023 and 2024.
China’s slowing industrial production growth and problems in the country’s real estate sector will also directly hit U.S. exporters. For example, the U.S. is the fourth largest supplier of machinery to China with exports value standing at $13.5 billion in 2022.
However, the impact of China’s slowdown to the broader U.S. economy is likely minimal, at least in the short-term. Euromonitor’s China Slowdown scenario predicts U.S. GDP growth will drop by 0.04 to 0.3 percentage points from baseline between 2023 and 2025. In the meantime, a slowdown in China could reduce inflation in the U.S. by around 0.1 percentage point from baseline in 2023 and 2024 as slower manufacturer price growth in China would make U.S. imports cheaper.
China’s economic slowdown could accelerate the “Great Decoupling”
Prolonged economic slowdown in China could escalate trade tensions between the U.S. and China. There are fears that a longer period of deflation and currency depreciation would make Chinese exports more competitive in the U.S. and other foreign markets, in turn hurting domestic companies.
This is unlikely to cause any major changes in trade over the short term, but long-term risk remains, especially in the U.S.’s manufacturing sector as a result of increased competition from China. Rising trade imbalances could also escalate U.S.-China tensions and lead to new trade tariffs imposed by both sides.
China’s economic slowdown could further accelerate the U.S.’s decoupling from China. According to the Euromonitor’s Sustainability survey, 71 percent of companies in North America plan to improve supply chain resilience over the next five years, with slowing growth and demand in China likely to accelerate such efforts. Changes in supply chains and trade flows could in turn benefit countries such as India, Vietnam, Thailand and Mexico. These countries could emerge as winners of the U.S.-China decoupling.
First signs of shifting trade flows are already visible. Between 2017 and 2022, the U.S.’s electronic components imports from China slumped by 37 percent while imports from Thailand more than doubled, indicating structural changes in the supply chains of critical components. Similarly, automotive exports from Mexico soared 28 percent in 2022 and are likely to grow further as car manufacturers diversify supply chains and relocate part of the production away from China to countries closer to the U.S. market.
However, geopolitical tensions could hurt the growth of American businesses, as they increasingly need to comply with stricter legislation and technological regulations both at home and in China. Companies operating in technology and finance sectors, as well as those supplying critical components like semiconductors and car batteries, are likely to feel the most pain as industry regulation tightens in the future. These factors pose a particularly large threat to small- and medium-sized companies that typically have less financial, technological and legal resources.
Justinas Liuima is an industrial research manager and consultant at Euromonitor International, a global market research firm.