China’s GDP Slump — Is It a Recession?

A recession in the United States is defined as two consecutive quarters in which gross domestic product falls. A Chinese recession could be very different, considering the nation’s recent traditional growth rate. In the first quarter, China’s GDP was only 8.1% — a three-year low. That may not be enough to sustain its manufacturing and infrastructure system, the growth of its middle class and new wage increases that help consumer spending.

The People’s Republic has added substantially to its manufacturing workforce over the past decade. That workforce now numbers nearly 800 million. Some of these people will fear for their jobs if China’s growth decelerates. At the same time this concern is burgeoning, workers agitate for higher wages. This is in part due to a need to offset inflation, as well as to the realization that workers in similar jobs abroad have the rights and power to press for better pay.

Better pay should simulate China’s consumer spending, which in turn may offset a decrease in exports. Of course, higher wages have another effect. Factories that operate on lower margins because of higher labor costs must adjust to a combination of increased pay and decreased demand for goods among nations that import China’s products. The export trouble will only be made worse by the recession in much of the European Union, the largest region in the world by GDP.

The government’s plan to offset slow growth is to make more credit available, a balancing act between a cause of inflation and a trigger for expansion. But the availability of money is only useful if people and businesses want it. In a slowdown, the demand for credit could trail off.

What represents a recession in China? Probably not two quarters of GDP contraction. For an economy in which 10% growth is the norm, the pain of 8% is significant.

Douglas A. McIntyre