The Chinese downturn

China's July export figures add to slowdown fears

Fears of faltering demand from China's two biggest customers, Europe and the US, lead economists to cut their forecasts

the Guardian,

10 August, 2012

Fears of a renewed global recession grew on Friday after faltering demand from the US and Europe was blamed for weaker than expected Chinese exports.

The world's second biggest economy also saw imports of oil and iron ore continue to fall, boosting expectations that the government in Beijing will act to shore up the economy.

The 1% rise in exports from China is the weakest since January, when exports fell, and marked a big pullback from annual growth in June of more than 11%. Shipments to the European Union dropped more than 16%.

Imports of crude oil sank in July to a nine-month low and those of iron ore fell for the fourth time in five months as refineries and steel mills cut output due to slackening demand. Overall, July imports rose 4.7% from a year earlier, the weakest pace since April and also well short of expectations for an increase of 7.2%. China is the top buyer of iron ore, coal and several industrial metals.

The FTSE 100 index in London was down 0.04% at 5847. The price of Brent crude dipped $1.25 to $112 per barrel while US crude was down $1.22 to $92.14.

"China will not escape from the global slowdown," said Banny Lam, China economist at CCB International in Hong Kong. He said the central bank might cut the amount banks must hold as reserves, which frees up cash that they could use for lending, as early as this weekend. Barclay's Capital said another rate cut was imminent after Friday's gloomy trade figures.

Ahead of the data, China's vice-minister of commerce, Gao Hucheng, told reporters it would be a challenge for China to meet its 10% trade growth target in the second half of the year. Just last month, the ministry had said it was confident of meeting the target.

Data on Thursday showed annual growth in China's factory output slowed to its weakest in more than three years in July, missing market forecasts. Other activity figures were also weaker than had been expected.

Sociéte Générale economist Yao Wei said: "Given this backdrop, the [export figures] from China merely reconfirmed that the severe headwind from the euro zone crisis and the US slowdown is blowing harder."

Falling demand in the west was highlighted by official figures showing that output from the UK construction industry fell by almost 4% in the second quarter of 2012 and has dropped by almost a 10th in the past year.

A moribund housing market and a big fall in public infrastructure work meant activity in the sector declined to levels last seen at the depths of the 2008-09 recession. The performance in the three months to June, however, was not as bad as the Office for National Statistics had feared when estimating the latest growth figures.

The ONS had factored in a 5.2% fall in construction output when it announced last month a 0.7% drop in gross domestic product, extending the UK's double-dip recession into a third quarter.

But on Friday it said the decline was 3.9%, raising hopes that the second quarter GDP figure will be revised upwards later this month.

City analysts said the new data for construction would be enough to add 0.1 percentage points to growth, and followed data for manufacturing earlier this week that was also less poor than the ONS had anticipated.

Howard Archer, UK economist at IHS Global Insight, said : "The current indications are that GDP may 'only' have contracted by 0.5% quarter-on-quarter in the second quarter. And the hope is that if the hit to industrial production and construction activity from the extra day's public holiday in the second quarter was overestimated by the ONS, there may also be an upward revision to services activity, which was reported to have contracted by 0.1% quarter-on-quarter."

The ONS said output from public infrastructure projects was down 8.6% between the first and second quarters of 2012 and was down almost 25% on the second quarter of 2011, when work on the London Olympics was under way. Construction industry figures said the outlook for the sector was poor.

Steve McGuckin, managing director of the construction and programme management consultancy Turner & Townsend, said: "All the sunshine and Olympic feelgood factor in the world can't hide the fact that these are black days for the construction sector. Stagnation has moved from the stuff of nightmares to the new norm. The big drop in infrastructure output is of particular concern for the economy as a whole."