Chancellor George Osborne is warning that the UK economy faces a ‘cocktail’ of threats in 2016. The foul combination of $33 oil (£22.30 – an eleven year low), bubbling middle-east tensions, the prospect of rising interest rates and rapidly disintegrating Chinese equity markets could prove too much for the UK to stomach, it seems. (Perhaps the chancellor didn't get what he wanted for Christmas. His autumn statement of six weeks ago was a lot gloomy.)
While Osborne will use this as an excuse to talk up the virtues of austerity as a prophylactic against boom and bust in a speech in Cardiff today, British business will be more concerned about just how unpleasant the bust will be, if indeed it materialises.
China is far and away the gravest worry. After losing 43% of its value over the summer, the country’s blue chip CSI 300 index had seemed to stabilise and even recover over the autumn. Just before Christmas, however, it began to fall again. Today, it and other key Chinese indices fell 7% before the government’s ‘circuit breaker’ kicked in and trading was suspended – after a mere half an hour.
The mounting panic there and indeed the People’s Republic’s failure to grasp the mentality of stock traders (closing the bank will not stop the run) are not just problems for China. It’s dragging on equities around the world, with the FTSE 100 for instance falling nearly 3% to 5,900 by late morning.
The collapse in China’s stock market bares the unpleasant flavour of the dot com bubble, when the Nasdaq grew by 200% in around 18 months, only to lose it all again over a similar period. As the chart below shows, the CSI 300 gained about 150% in only a year, and in only six months it has erased two thirds of that growth.
What goes up... Credit: Bloomberg
Time to stock up on baked beans and run for the hills then? Perhaps not. For a start, the stock market collapse itself is more the symptom than the problem.
Years of investment-driven growth in China have led to oversupply, while demand in domestic markets from construction to smartphones is slowing down. The equities collapse will have a chilling effect as investors lose wealth and dividend income, but it probably won’t shift the underlying course of the Chinese economy.
The slowdown itself, which is the real problem, is getting increasingly hard to deny, even if China’s official growth figures remain at 7%. It’s clear from a host of factory data and the collapse in the country’s demand for commodities that China is rapidly decelerating - some estimates put growth at a measly 3%.
But China isn’t America. Its sneezes do not necessarily cause the world to catch a cold, at least not yet. The billions being wiped out on Chinese markets belong to Chinese nationals, which to an extent contains the immediate shock. Besides, China is basically an import partner for Britain and Europe. Though the figure had been expanding rapidly, only 3.7% of UK exports go there. A dip in Chinese demand isn’t enough on its own to take the UK economy down with it.
Commodities, commodities everywhere
Instead, the impact is largely being felt by those British companies with big exposure to China, such as oil and especially mining companies that had for many years benefited from the inflating effect Chinese growth had on commodities prices. The slowdown in China has caused those prices to plunge, which has forced mining empires like Glencore and Anglo American into dramatic cost cutting and asset selling measures to keep them from drowning in their own debt. Oil firms haven’t suffered as badly, though Shell’s recent $6bn loss from asset impairments has got to sting.
China’s increasingly apparent slowdown probably means these businesses, as well as banks like HSBC and Standard Chartered that are highly exposed to that part of the world, will continue to face tough conditions for some time to come, but in a sense the shock is over. Commodity prices are unlikely to fall as far as they already have done, and oil at $10 a barrel remains unthinkable.
For most businesses and for the wider UK economy, there’s nothing like as much to worry about - yet. Indeed, low oil and commodity prices and cheaper Chinese imports will be a good thing for a lot of businesses, tending to reduce costs and thereby increase profits.
The danger is that China’s economy will indeed fall into a genuine recession, taking the Asia Pacific region down with it. Unfortunately, this is not something Britain could just shrug off so easily. But it is still far too early to say this is going to happen. Deflating stock market movements and even dreary manufacturing data are not proof enough of such a disaster. Until we know more, caution - rather than panic - is what’s required.