Landing getting harder

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One of the downside scenarios we've discussed this year for growth is if China were to encounter some sort of 'hard landing' whereby demand for UK exports fell away sharply.

This matters because even though only about 3% of our goods exports went to China in 2011, our goods exports to China in 2012q2 were 38% higher than 2010q2. Whereas our exports to the EU - accounting for over 50% of the total - have actually fallen over the same period.

So UK export growth is heavily dependent on the parts of the world that are growing, like China, to help offset the weakness in traditional markets in Europe that are struggling.

It's concerning then to read some economists talking about the prospects for a sharper slowdown in China increasing.

Our last Economic Prospects publication in July noted China's GDP expanded 9.2% in 2011 and we expected a 7.5% expansion this year.

Now some people are saying that growth in China has slowed to an annualised rate of just 6.5% with little prospect of much improvement until next year.

6.5% still sounds like a lot for us mired in a second recession but it represents a considerable slowdown for China and it means that Chinese demand for goods produced by the rest of the world is slowing.

The Chinese manufacturing sector is apparently very weak - this will have implications for UK manufacturers of mechanical equipment - machine tools and the like, investment goods used in factories. This sector had a strong 2011 but is already showing some weakness in 2012.

Why is this happening? According to Peter Redward of Redward Associates, it's because:

'The need for rapid infrastructure build-outs is beginning to drop away.'

And

'The availability of credit to small businesses is actually tightening again.'

Worryingly despite China's monetary and fiscal headroom to act to stimulate the economy (unlike, say, India), Redwood sees officials likely to stay their hand for fear of creating 'long-term impairments' on Chinese balance sheets - easy credit leading to bad investments or simply flowing through into property, which is already over-inflated.

Certainly one to watch in the second half of this year.

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