An ABR Perspective : Bloomberg’s Chang On China

Anil Prabha

July 8, 2020

Asia Blockchain Review recently had the privilege to catch up with Miss Chang Shu, Chief Asia Economist, at Bloomberg Economics. This is part 3 of the interview with a distinct focus on China.

According to Miss Chang of Bloomberg, lock-down-driven demand and supply-side shocks from major trade partners will deal a significant blow to China’s economy. Chang estimates the impact could reduce GDP growth in 2020 by more than 3 percentage points, based on a global macroeconomic model.

A historic contraction across major economies is set to take a chunk out of demand for China’s exports. The heaviest blows are expected to come from the U.S., Germany, and Italy. Factory shutdowns overseas mean China will also incur a supply shock from disruptions to imports of components.

Bloomberg modeling suggests this will be smaller than the demand shock, though it’s hard to make precise estimates. We have factored the impact of the demand and supply shocks into our latest forecasts for China’s growth.

The economy is showing encouraging signs of returning to normal. Even so, weaker exports and broken supply chains will impede the recovery from a deep contraction early in the year, leaving growth for 2020 around 2%.

Global Growth Downgrades

Major economies are facing downturns not experienced since the Great Depression: The U.S. is forecast to contract 6.4% in 2020, down from a pre-virus forecast of 2% growth.

In Europe, Germany, France and Italy are expected to contract 5.5%, 8.6% and 13.2%, respectively, down from expectations of growth of around 1% before the outbreak.

Japan may have a less-severe contraction of 4%, compared with a forecast for slight growth before the pandemic. Among major emerging market economies, India saw the biggest downgrade. We expect a contraction
of 4.5%.

Demand Shock – Drag on China GDP From Forecast Downgrades

The repercussions for the Chinese economy are set to be significant. Bloomberg quantifies the demand impact using simulations from NiGEM — a global model.

It’s the contraction in U.S. and Germany that’s set to have the biggest negative impact on China. Their slowdowns could trim China’s growth by 0.6 and 0.4 ppt, respectively. Italy’s impact is close to that of Germany, reflecting the depth of its slump.

The downturns in the U.K., France and India will also make a sizable dent in China’s growth. An escalation in U.S. – China trade tensions adds downside risks.

The blame game over the origins of the coronavirus, China falling short on purchase targets under their trade deal, and the looming U.S. Presidential election all raise the possibility that the trade truce will break down.

Bloomberg’s analysis shows that a widening in U.S. tariffs to all China’s exports to the U.S., for example, could shave another 0.6 ppt off China’s growth. That’s not included in Bloomberg’s baseline forecast – it is a risk.

Supply Shock Hinges on Sector, Country Exposure

We derive the supply side impact from the Organisation for Economic Co-operation and Development’s Inter-Country Input-Output (ICIO) Tables.

Exposure to each trading partner is calculated as the weighted average across
Chinese manufacturing industries of each industry’s maximum share of different relevant manufactured inputs imported from the trading partner.

Overall, the macroeconomic impact from supply chain disruptions is likely to be much more modest, but it will add to the demand shock and weigh on manufacturing activity.

Some industries will see meaningful disruptions — typically those with large and concentrated exposures to inputs from specific partners, such as manufacturers of electronics and other transport equipment. China is most exposed to supply shocks coming from the U.S. and Korea, followed by Japan, Germany and Canada.

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About the author
Anil Prabha

Editor In Chief

Anil started his career in journalism all the way back in 2003. After traversing the sphere of editorial, corporate communications and advertising, he has now come full circle and is back in the world of journalism. He believes in the power of the written word, and its ability to enthrall, delight and inform the reader.

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