Recent headlines make for grim reading for the UK economy with speculation about inflation of 18%, soaring energy and food prices, potential power shortages, manufacturing output down and a probable recession.

With all that is looming over us here, you would be forgiven for missing the current issues with China, which were highlighted in the Guardian on Monday. The Chinese economy is currently experiencing issues with its housing sector, and there is serious risk of the contagion spreading to the rest of the economy leading to a potential recession. There is civil unrest and Bank runs have started. The IMF has already downgraded growth to 3.3% for this year and the lower this figure becomes, the less likely it is that economic information coming out of the authoritarian state will be reliable.

The zero Covid strategy is looking increasingly difficult, but the Chinese Communist Party is going to find it hard to change tack without effectively admitting they were wrong. So what do they do? After the 2008 crisis, the Chinese Government was able to stimulate their economy by pumping billions into infrastructure projects like high-speed rail, but that kind of money just isn’t available anymore with property companies like Evergrande potentially needing a bailout (and highspeed rail now being a trillion dollar loss making albatross). The article goes on to suggest that the Chinese economy needs to be stimulated by consumers, but there are both political and structural issues with this, as well as a general reluctance to spend given what is going on in the property market.

What does all this mean? 

A massive slowdown in China could lead to a glut of commodities or manufactures on the market meaning a reduction in prices for exports, potentially exporting deflation to the West, which may be useful to partly counterbalance its own inflation. However, weak demand from the West due to its own challenges could mean that this does not materialise, further compounding issues with the Chinese economy.

As a result, the next 12 months may be even more unstable than it already looks. Western importers who are subject to the Asian supply chain issues could experience what Michael Burry (of The Big Short fame) terms a ‘bullwhip effect’ in orders. This would mean highly volatile supply and demand as importers try to predict what they will be able to sell and over what period. Companies’ working capital could be tied up in stock for substantial periods with cycles of supply glut as companies try to get rid of excess products. This would potentially cause equal and opposite cash crunches meaning cash is then not available to be used to get through tough trading periods leading to business failure.

One further potential outcome of a Chinese economic crisis and the current supply chain issues could be that UK and Western business repatriate supply to closer more reliable countries, effectively reversing Globalisation.

On top of all of this, for the long term, it is becoming painfully obvious that China also has a population problem and not of the sort that that we might expect. Experts in demographics currently expect China to undergo what is effectively a population collapse. The population is expected to fall from 1.4bn to 587m by 2100. Again, the long-term implications on British business and consumers are profound, and without a crystal ball, there’s no telling what might happen in the next 20 years.

One hope for the UK and the West is that the market economies are sufficiently flexible to be able to react and compensate for international events, after all significant international shocks have occurred in the past – it may just take a few years to get through it.