China Could Trigger a U.S. Recession

A lack of demand for China’s factory goods could be triggered by a slowdown in demand, particularly from EU countries. That almost certainly would hurt GDP growth in the People’s Republic. Chinese authorities likely would push more money into the economy, which has happened in the past month. What has not been discussed often is that, if China’s economy slows considerably, the problems created by lack of demand for its exports could cause a recession in the United States.

S&P recently put out a list of potential problems for the U.S. credit markets and economy. Among those are the usual risks, including the housing market and contagion for a collapse of one of more of the European economies. Also included among the threats is that China’s gross domestic product could drop to 5%.

S&P reports that a Chinese GDP collapse is entirely possible:

As Europe’s leaders grapple with a debt crisis and recession, and the Obama administration looks for ways to bolster the U.S. economy, world growth in 2012 will rely heavily on China. After real GDP growth in China slowed slightly to 9.2% in 2011, our base-case economic scenario calls for about 8% GDP growth this year from double-digit expansion in recent years.

We view the risk of only 5% GDP growth in China as plausible, although a stable one at this point. If such a scenario were to materialize, its negative effect on the U.S. and global economies could be substantial, particularly in the commodities and materials markets, where China is a large source of demand.

The normal position of the tables would be turned. China could become a less potent market for U.S. exports. And American GDP would be badly battered by a drop in demand for its agricultural products and manufactured inventories for expensive items such as airplanes. Just as bad would be a slowing of demand for U.S. intellectual property, which runs from software to services.

It is sometimes forgotten, particularly when trade numbers show that China’s export machine has hurt the U.S. trade balance, that the People’s Republic is one of the largest countries for U.S. exports. It would be ironic, but a Chinese recession could spread to America and sink GDP here as well.

Douglas A. McIntyre