Of particular concern is the dark shadow that the Chinese crisis is now casting over the sickly Japanese and German economies.
Three of the world's four largest economies are facing major problems, which could affect the U.S. as well.
J ohn Donne famously wrote that “no man is an island entire of itself.” Something similar might be said of the U.S. economy.
Anyone doubting that the U.S. will be affected by China’s economic troubles has not been paying attention to the seriousness of China’s woes. Nor have they been taking note of the impact that this crisis is already having on the economic outlook of its Asian trade partners, Germany, and the commodity-dependent emerging market economies.
Of particular concern is the dark shadow that the Chinese crisis is now casting over the sickly Japanese and German economies. Those economies are the world’s third- and fourth-largest economies after the United States and China. With three of the world’s largest economies now more than likely to experience substantial economic slowdowns, it is difficult to imagine how this will not adversely affect world financial markets and the U.S. economic outlook.
If China does indeed tip the rest of the world economy into recession, we will find little comfort in the fact that the direct impact of China’s economic woes on our economy might have been limited.
The Chinese economy seems to be in the eye of a perfect economic storm. There is now every sign that the country’s property and credit bubbles are bursting. They are doing so at the same time as the country is having to contend with intensifying U.S. trade restrictions and a slowing world economy.
Compounding matters have been the egregious policy mistakes made by Xi Jinping, who has abrogated for himself the most economic power of any Chinese leader since Mao Zedong. These mistakes include the zero-Covid policy that shut down large parts of the economy, a confrontation with the country’s dynamic high-tech sector, and the rolling back of some of Deng Xiaoping’s market-oriented economic reforms that helped put China on its earlier high-economic-growth path.
Japan’s 1990s experience with a lost economic decade following the bursting of its property and credit bubbles would seem to be particularly instructive for China. This is in part because China’s property- and credit-market bubbles are estimated by the Bank for International Settlements as being at least of a comparable size to those which preceded Japan’s lost economic decade. (And Japan was already a high-income country when disaster struck.) It is also in part the result of China’s very poor demographics as a consequence of the country’s earlier one-child policy. With China’s labor force already declining and expected to decline for as far as the eye can see, and much of the source of its growth (infrastructure investment and real estate) evaporating, it is difficult to see how the country can possibly grow its way out from under its debt mountain.
All of this makes it all too likely that China is well on its way to a Japanese-style lost economic decade. If that were indeed to occur, no longer would the world be able to count on China to be its main engine of economic growth. Also, no longer would the emerging market economies be able to count on China to keep international commodity prices well bid.
Even before the Chinese economic crisis, Germany was being labeled again as the sick man of Europe. In large part because of that country’s high dependence on Russian natural gas and of the slowdown in world export markets, Germany has already succumbed to recession. Of all the G7 economies, the German economy is the only one for which the IMF is forecasting a recession this year.
The last thing that a sickly German economy needs is a lost economic decade in China, its largest trade partner. Germany’s exports of goods and services to China amount to almost 4 percent of German GDP, and the revenue of its Chinese affiliates accounts for a further 6 percent of GDP. A German economic setback triggered by the Chinese economic crisis has the potential to drag down the rest of the euro zone economy and set off another round of debt crises.
All of this makes it difficult to understand why, in his recent Jackson Hole speech, Jerome Powell did not so much as mention the Chinese economic crisis. But then again, perhaps one should not be surprised that the Federal Reserve paid no mind to China’s economic woes. In 2008, it was also asleep at the wheel at the onset of the Great Recession triggered by the Lehman bankruptcy.