ECB sees modest impact from China slowdown if spillovers limited

[FRANKFURT] China's slowdown won't have a major impact on the euro-area economy unless it sparks a global economic downturn, according to the European Central Bank.

"Trade spillovers from a continued slowdown of economic activity in China are likely to have only a modest impact" on euro-area gross-domestic product, the central bank said in an article to be included in its Economic Bulletin. The impact on the euro area of a potential further slowdown in China ultimately hinges on the extent to which this slowdown spills over to other emerging markets more generally, and the degree to which the resulting loss of confidence affects global financial markets as well as global trade."

The currency bloc's recovery is proving resilient to turbulence in emerging markets, with a gauge of economic activity by Markit Economics signaling growth of 0.4 per cent for the final quarter of the year. Even so, with inflation stuck at zero, President Mario Draghi has left the door open to an expansion of the ECB's quantitative-easing program.

China accounted for about 6 per cent of euro-area exports in 2014, up from only 2 per cent in 2008. Germany, the region's largest economy, relies on China for almost 10 per cent of its overseas sales.

"Products are shipped to China for further processing or assembly and then re-exported to another destination for final consumption," the ECB said. "Hence, a slowing of Chinese activity is likely to have less of an impact than would be suggested by gross trade flows."

The ECB said it calculates that a 1 percentage-point loss in Chinese GDP would lead to a decline of 0.1 percentage point to 0.15 percentage point in euro-area economic activity after two to three years.

BLOOMBERG