China’s ‘stagnant’ GDP highlights and what they say about Brazil
The resumption of the world economy — which had barely begun — is rocking once and for all. One of the strongest signals comes from the Chinawhich announced this Friday, 15, its worst growth since the beginning of the covid-19 pandemic, in 2020.
Chinese GDP grew by 0.4% in the second quarter, between April and June, compared to the same period last year. The result was far below market forecasts, of 1.2%, and far short of the 4.8% recorded in the first quarter.
The brake on the “factory of the world” has widespread impacts on the global economy and also on Brazil.
“The result came below expectations, and as Brazil has a great exposure to China, it ends up worrying more”, says Luca Mercadante, economist at Rio Bravo.
The main point in the stagnant GDP came from the effect of lockdowns to contain cases of covid-19, as in the metropolis Shanghai, closed for two months from April.
On the other hand, Mercadante points out that important sectors for Brazil and iron ore consumers, such as industry, are on their way out of the worst moment, especially with better numbers in June.
“Services was a major downturn in the Chinese economy with the lockdowns, which, looking at Brazil, may not be such a big concern. But it also impacts income, demand, how much they will spend. That is why the growth of China as a whole is always important in relation to Brazilian exports.”
Trade with China was largely responsible for holding back part of the Brazilian economy in the years of crisis, but the focus on few products is also a risk in the event of a Chinese slowdown.
O Brazil sold nearly US$ 88 billion to China last year, well ahead of the US$ 31 billion sold to the US and the US$ 12 billion to Argentina. Soybeans and iron ore alone accounted for more than 60% of Brazilian exports to China in 2021 and also in the first half of this year.
Lower growth in China will be a reality
Despite the prospects of improvement for the rest of the year, the Chinese government target of 5.5% growth sounds less and less feasible – although even that number was already the slowest growth in three decades in China.
A number of market players have cut forecasts for 2022. In June, the World Bank had already revised its estimate of Chinese growth from 5.1% (in December) to 4.3%, stating at the time that strong growth was expected. stimulus from the Chinese government in the second half of the year to reverse the impacts of the lockdown.
Expectations may be even lower with today’s result. Goldman Sachs, which had one of the highest estimates, pulled the string and cut its growth forecast for China in 2022 from 4% to 3.3%.
For the near future, although there have been reopenings in several cities, new waves of covid-19 remain a challenge, as the government seems willing to maintain the “covid zero” policy that tries to combat the spread of new cases.
More than 200 million people are currently in restricted locations in China, including major cities.
Another focus comes from the real estate market. Home sales dropped 22% in June, although the data is slowly improving (from a peak of 42% decline in April).
With delays in deliveries and some companies without resources to finish the works, families have demanded a halt in mortgage payments. Any problem in this chain could affect construction companies with riskier debts, in a sector that is estimated to be responsible for a quarter of the Chinese economy.
Chinese banks announced that there are 2.1 billion yuan (more than $300 million) in risky loans related to unfinished homes.
“In the current downturn in the housing market, the mortgage payment suspension could exacerbate the liquidity problem faced by hard-pressed property developers, resulting in more defaults and delays in project deliveries going forward,” Swiss bank UBS described in a report this week. . However, analysts cite that most of the Chinese banking system is not at risk.
The root of the debate comes from the delicate balance that maintained the sector, with highly leveraged companies sustaining themselves by betting on a scenario of rising prices in cities. The problem was exposed amid measures by the Xi Jinping government to dampen the growth of property prices, with less credit and other regulations.
With values falling for the first time in years, companies in the sector found themselves with high debts and unable to finish part of the works. A crisis of which the mega-builder Evergrande (which almost went bankrupt and is trying in fits and starts to restructure its operation) became the biggest symbol in the last year.
Global recession remains a risk
The international scenario beyond China worsens the outlook, as, with record inflation in the US and Europe and rising interest rates in response, a global recession is increasingly on the radar. New widespread lockdowns in China would further increase pressures by affecting the supply chain and inflation around the world.
For Brazil, all movements that could slow down Chinese GDP are bad news not only because of direct exports, but also because of the Chinese influence on commodity prices. The possibility of a slowdown in China has already brought down the price of iron ore, which fell to its lowest level in eight months on Thursday, 14 (and made Vale’s share fall 6%).
In the short term, Brazil is expected to grow more than initially expected in 2022, with GDP rising 2% in the Ministry of Economy’s projections (Credit Suisse bank also raised its forecast to the same 2% yesterday). The optimism comes from the big impact of high commodity prices so far, post-pandemic reopening and fiscal stimulus in Congress. Inflation, currently around 12%, should invariably fall in the second half of the year. But the coming months will make it clearer how much the international impacts can affect the domestic situation.
Meanwhile, with the Chinese government expected to expand stimulus to accelerate the economy in the second half of the year (especially if it still wants to pursue its 5.5% growth target), part of the market also seems to believe that the worst for the Chinese economy is over.
China’s June data showed some signs of improvement, which partly explains why near-zero growth in a country used to exponential highs didn’t knock markets in Europe down early on Friday.
Despite this, so far, everything indicates that China will not experience such a rapid and strong recovery – and, above all, that Beijing should not again be the great engine of a world in recession. The small “commodities boom” that favored Brazilian exports in recent years may not have a long life.