Plunging Demand for Chinese Goods Threatens Rickety Global Economy

Orders for Chinese-made goods have plunged in recent months, a foretaste of more challenges for the world's second-largest economy that could ripple throughout an already cooling global economy next year.

U.S. orders for manufactured Chinese goods have declined 40%, according to data compiled by CNBC's Supply Chain Heat Map. The slide has contributed to global trade weakness and may cause China's factories, which usually halt production for a week every January for Lunar New Year celebrations, to close a few weeks early next month.

The slide in orders represents the latest hurdle for a Chinese economy struggling with how to ease stringent pandemic restrictions, a weak property market, and government crackdowns on the private sector, particularly the technology industry, which has lost more than $1 trillion in market value in the past two years.

Slipping demand for Chinese manufacturing further clouds the outlook for a global economy facing high inflation, rising interest rates, and the fallout from war in Ukraine. It's already had an impact: All four sentiment gauges in Bloomberg's Trade Tracker fell below average at the start of December, and the Baltic Exchange Dry Index, which measures the worldwide cost of shipping goods, has dropped by a third in just the past two months.

Economic Outlook 'Darkens Noticeably'

Looser Covid-19 restrictions will probably boost Chinese growth next year. The OECD expects its economy to expand by 4.6% next year from 3.3% in 2022, even as it forecasts overall global growth to slow to 2.2% in 2023 from 3.1% this year.

Yet the decline in orders for Chinese goods threatens to reduce both forecasts because such exports account for a fifth of the nation's economic output.

China's outlook has "darkened noticeably" this fall, Gita Gopinath, deputy managing director of the International Monetary Fund, said this week.

Speaking at a discussion sponsored by The Wall Street Journal CEO Council, Gopinath said the IMF trimmed its outlook for China's 2023 growth rate to 4.6% in October from 6%, "and in January, we will be going lower."

Not Just a Short-Term Demand Problem

Plunging demand for China's goods partly reflects a shift by many global companies away from China as a main source for parts and raw materials. Frustration with the pandemic's supply-chain distress and the nation's extended restrictions have prompted many firms to reassess their reliance on Chinese suppliers.

Many U.S. firms, for instance, have rebooted domestic production. Companies worldwide also have shifted production to India, Vietnam, and other Southeast Asian countries with fewer regulatory hurdles and cheaper labor markets.

The U.S. government's recent implementation of the CHIPs and Science Act, promoting domestic production of semiconductors, highlights challenges facing China's suppliers. Micron Technology, one of the world's leading chip firms, recently announced plans to build a $20 billion production facility in upstate New York, an investment that could eventually rise to $100 billion over the next 20 years and add tens of thousands of jobs to the region.

Last weekend, meanwhile, The Wall Street Journal reported that Apple plans to move much of its iPhone production outside China. The company has endured supply shortages throughout the pandemic, exacerbated by recent protests at the world's largest iPhone plant in Zhengzhou.

Apple reportedly lost $1 billion a week in iPhone sales in November because of the plant's turmoil. Foxconn, the factory's owner, indicated this week that full production there will resume by early January.

Monetary Policy Implications

Still, a slowdown in demand for Chinese goods in 2023 could have broader implications for global economic policy.

Central banks in developed markets, led by the Federal Reserve, have increased interest rates significantly this year to address the fastest surge in global inflation in four decades.

The 1982 global recession, when growth in developed countries fell even lower than during the 2008 financial crisis, came after central banks raised rates dramatically to fight inflation.

Many economists fear the scenario could repeat in the coming months.

Predictions of global economic contraction led by the U.S. have increased in the past few months. Among others, Ned Davis Research predicts a 98% chance of a global recession, Bloomberg's Economic Model predicts a 100% chance of a U.S. recession, and The Wall Street Journal's latest survey of economists shows that 63% anticipate a U.S. recession in the next 12 months.

With recession risks clearly rising, the Fed and other central banks may find that sticking to their inflation-fighting targets will be more complex, especially if weakened demand for China's goods and sluggish global trade persists.