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China economy
OpinionComment
Nicholas Spiro
Nicholas Spiro

Macroscope | A resilient US economy and weak recovery in China? Think again

  • Expectations earlier this year of a US recession and a rapid rebound in China have backfired, leading to consternation among some investors
  • Even so, many investors are uncomfortable with the notion of a resilient US and an underperforming China and could will the narrative to change

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An engineer checks a laser-cutting machine, to be sold to automotive manufacturers for the production of new energy vehicles, at a facility in Wuhan, in China’s central Hubei province on June 12. Photo: AFP
Nicholas Spiro

At the beginning of this year, two of the most popular bets in financial markets were that aggressive monetary tightening in the United States would cause a recession while the sudden reopening of China’s economy would trigger a sharp rebound.

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Despite differences of opinion among investors over the timing of a US recession and the strength of China’s recovery, the consensus was that the prospects for China following three years of self-imposed isolation were a lot brighter than those for the US and other advanced economies.

Nearly halfway into the year, those bets have backfired. This is mostly because of unrealistic expectations on the part of investors but also because of confusing economic signals.

China has been the big disappointment this year. A slew of indicators during the past several weeks point to a faltering recovery. A gauge of manufacturing activity in May contracted at a faster pace than in April, exports shrank for the first time in three months, credit demand is weakening and industrial profits continue to fall amid deepening producer price deflation.

Sentiment towards China has deteriorated dramatically. The results of Bank of America’s latest global fund manager survey, published on June 13, showed that only 20 per cent of respondents expected stronger growth, down from 90 per cent in January. Moreover, an underweight position in Chinese stocks is now one of the most crowded trades in markets, amplified by the fact that two key equity gauges recently entered a bear market for a short time.

A man reads a sign for employment posted at a Chipotle business in Los Angeles. A recent US Bureau of Labour report shows that the public and private sector added 339,000 jobs in May despite the Federal Reserve’s aggressive interest rate increases in an attempt to lower inflation. Photo: EPA-EFE
A man reads a sign for employment posted at a Chipotle business in Los Angeles. A recent US Bureau of Labour report shows that the public and private sector added 339,000 jobs in May despite the Federal Reserve’s aggressive interest rate increases in an attempt to lower inflation. Photo: EPA-EFE
The US economy, by contrast, has proved more resilient than expected. While there are clear signs growth is slowing – manufacturing activity is contracting, retail sales are tepid and a string of bank failures earlier this year has caused lending standards to tighten more sharply – the country’s labour market has remained remarkably tight as persistent pandemic-induced shortages of workers fuel intense competition among employers.
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