China’s fragile trade economy could be at risk, as EU outlook goes from bad to worse

A recession in Europe would hit demand for Chinese exports and could lead to a further narrowing of China’s trade balance, analysts have said.

Existing concerns that Europe was on the verge of a recession were stoked on Friday by new data which shows the bloc’s manufacturing sector is struggling.

The euro zone purchasing managers index (PMI) showed that manufacturing contracted in March, at a rate not seen in nearly six years. Along with the already weak performances of major European economies and uncertainties over the impact of Brexit and the US-China trade war, the data added to concerns that Europe is headed for a downturn later this year or early in 2020.

“Europe has moved into the same phenomenon as Japan or maybe even worse. Population has peaked but it also has pretty poor productivity,” said Francis Scotland, director of global macro research at Brandywine Global Investment Management. “I see it already entering into some sort of technical recession.”

A recession is when gross domestic product (GDP) shrinks for two successive quarters. Should the EU dip into recession, it would be bad news for China’s trade economy.

China is the EU's biggest source of imports and its second-biggest export market. China and Europe trade on average over €1 billion (US$1.13 billion) a day, according to EU figures.

“The euro zone is a major export market of China’s so poor European data will definitely hurt Chinese exports,” said Nathan Chow, an economist at DBS Bank. “The main worries of a global slowdown are emanating from Europe, especially Germany.”

Max Zenglein, head of economics at the Berlin-based Mercator Institute for China Studies (MERICS) agreed that a recession in Europe would mean less demand for Chinese exports and would add pressure on China’s already struggling manufacturing sector.