The latest economic data indicates a slower-than-expected recovery for China. In this episode, John Wyn-Evans, Head of Strategy at Investec Wealth & Investment UK, and Quentin Allison, Investec Head of Commodities and Trade in South Africa, take an in-depth look at China’s economic prospects in the face of lower consumer demand, high interest rates and stubbornly high inflation globally.

China's post-lockdown recovery has fallen short of market expectations, raising concerns about the global economy and the impact on emerging markets like South Africa.

 John Wyn-Evans, Head of Strategy at Investec Wealth and Investment UK, and Quentin Allison, Investec's Head of Commodities and Trade in South Africa delved into the factors hindering China's growth on the latest edition of the Investec podcast No Ordinary Wednesday. They touched on the implications for the global economy, the impact on emerging markets, and the outlook for commodities.

China’s slow recovery

While China's first-quarter GDP growth exceeded expectations, recent economic data suggests a slower recovery. Wyn-Evans notes that the traditional growth drivers, such as debt-fuelled investment in infrastructure and real estate, may not be as effective this time.

“The government's focus on sustainable growth and increased domestic consumption presents new challenges. Additionally, Chinese citizens did not receive significant government handouts during the pandemic, leading to reduced consumer spending. However, the luxury goods market has performed exceptionally well, boosting economies like France,” says Wyn-Evans.

China recovery: implications on global growth

The pair acknowledged that China's slower recovery has negative repercussions for the global economy, although it is not as significant as it was during the 2008 financial crisis.

 Notes Wynn Evans: “The resilience of the US economy and weaker energy prices in Europe have helped offset some of the impact. The mix of growth, with more focus on services rather than goods and commodities, will lead to different experiences for countries, especially in emerging markets. However, the weaker recovery has contributed to a decline in certain commodity prices, which may help ease global inflation and interest rates.”

Emerging markets feel the pinch

China's economic slowdown affects emerging markets to varying degrees based on their level of exports to China.

South Africa, for example, heavily reliant on China as its biggest market for commodities, will feel the impact.

Allison pointed out that emerging economies dependent on Chinese outbound tourism are also experiencing significant declines.

“However, South Africa's mining sector has shown resilience, with some commodities performing well despite the overall slowdown. Trade relations globally are affected by these growth worries, and South Africa's relationship with the US is under strain due to arms supply to Russia, potentially jeopardizing the AGOA agreement, which has been crucial for South Africa's exports to the US,” says Allison.

Outlook for China

Looking ahead, the pair agreed that China needs to focus on sustainable growth and investment in productive capital and technology to drive its economy. However, geopolitical risks and tensions between the US and China remain a concern. While the impact on the global economy and emerging markets is evident, both believe that worst-case scenarios, such as a trade war or invasion of Taiwan, are low probability events.

 As for commodities, the outlook is mixed, with some experiencing price declines, while others, such as platinum and gold, show resilience due to specific factors like supply concerns and inflation hedging. In South Africa, the mining sector has shown moderate performance despite challenges like load shedding. Overall, the global economy faces uncertainties, but it's crucial for countries to focus on what they can control, maintain trade relations, and adapt to the changing landscape to ensure stability and growth.

China's slower-than-expected recovery poses challenges for the global economy and emerging markets. While the impact varies across countries and sectors, it highlights the need for sustainable growth strategies and diversification.

 As the global economy navigates through uncertainties, it's essential for policymakers and market participants to monitor China's economic trajectory and adapt to evolving dynamics.