Imports to China fell in August compared to the same month last year, indicating domestic demand weakened. UK manufacturers are vulnerable because China was the fourth most important destination for British goods in 2014, accounting for 11% of total exports. Manufacturers of road vehicles are the most exposed, followed by metal working machinery, leather goods, professional and scientific and controlling instruments, and electrical machinery and appliances.
As trade is the main linkage between the two economies, modelling the impact of a fall in China’s total imports should provide guidance about the impact on the UK. Our macroeconomic model was shocked with a drop of 12% start-to-trough in China’s total imports in 2015, which is equivalent to the decline during the Asian financial crisis in the late 1990s.
The results showed that the decline in China’s imports would weigh on UK real GDP, manufacturing output, and manufactured exports in 2015 and 2016. The model estimated that the drag on real GDP and manufacturing output would be around 0.3 percentage points in 2016. The impact on manufactured exports is more sizeable at around 1.2 percentage points lower in 2016.