Breaking: China’s GDP Growth Dips to 6.8%, Threatening Region – IMF Report

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China’s third quarter GDP growth is likely to come in at 6.8%, the weakest result since the 6.2% it posted in the first quarter of 2009 when the global financial crisis was at it worst. While that is hardly a disaster, it suggests that Asian economies are facing headwinds in the coming months.

In a report released this week during the annual IMF and World Bank annual meeting in Lima, Peru, the IMF stated, “Given the sheer size of the Chinese economy, a negative growth shock there would hit the rest of Asia-Pacific region hard.”

IMF: China’s Negative Growth May Damage the Asian Pacific Region

“Econometric estimates accounting for trade and financial linkages between China and the rest of Asia indicate that spillovers could be sizeable, with a 1 percentage point drop in China’s GDP growth lowering Asia’s GDP growth by about 0.3 percentage points,” it said.

In South Korea, the lower Chinese growth figures have hurt exports. The Wall Street Journal notes, South Korea’s exports of $39.33 billion in August, its eighth consecutive month of declines, included an 8.8% fall in shipments to China, which absorbs one-quarter of Korea’s total exports.”

Meanwhile, Singapore has narrowly averted recession, typically defined as two consecutive quarters of negative economic growth (how economists describe an economy shrinking), in part by easing monetary policy.

While third quarter results are not in for a great many Asian nations, second quarter figures suggest a gathering storm. Japan’s GDP shrank in the second quarter; Taiwan’s 2015 growth is likely to be the slowest in six years; Indonesia’s 4.6% growth in second quarter is actually its worst outcome since 2009; Thailand’s GDP growth has beaten expectations, but it’s still weak.

China’s Trade Deficit: Demand Is Softening

China may have a trade surplus with the United States, but it runs a trade deficit with many of its neighbors, importing raw material or parts for assembly. With commodity prices denominated in US dollars and with the dollars recent run up, Chinese demand is softening, and this will weigh on the region.

Moreover, domestically China needs to have 7.2% to generate the 10 million jobs its needs every year, according to Premier Li Keqiang, back in November 2013. Also, the Chinese leadership has reason to worry if urban unemployment rises much beyond 4%.

Producer Price Index Is Down: A Deflationary Spiral May Harm The Chinese Economy

China’s economy is also in transition, from an underdeveloped one to a maturing economy. In April 2013, at the Boao Forum for Asia in southern China, Chinese Presidenx Xi Jinping said, “I don’t think China can sustain super-high or ultra-high-speed growth.”

A further troubling point for China and its neighbors is the decline in the producer price index that shows a drop of 5.9% year over year. This is the 43rd consecutive month of producer price declines. The consumer price index is still in positive territory at 1.6% for September, but that’s down from 2.0% in August. Falling prices can set up a deflationary spiral that would further harm the Chinese economy in the coming months.

However, that doesn’t presage a global recession. “The German economy continues to grow. It is still well on track despite the dampened global economic outlook with weaker growth in China and emerging countries that are rich in raw materials,” said Economics Minister Sigmar Gabriel. “The positive employment development and corresponding rise incomes contribute to this. The main pillar of the positive performance is private consumer spending.”

Meanwhile, in the US, GDP is growing at close to 4%.

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