How will Iowa be affected by market turmoil in China?
CHRIS CONETZKEY Feb 3, 2016 | 8:56 pm
2 min read time
481 wordsAll Latest News, Arts and Culture, Business Community Events, Business Record Insider, Economic Development, Energy, Government Policy and Law, Innovation and Entrepreneurship, Manufacturing, Real Estate and Development, TransportationTo shake things up this year, our newsroom brainstormed a list of key questions that we thought business people should know the answers to in order to do business better in 2016. Then we went out and found 13 experts to give their opinions and lend their expertise to help forecast the answers to those questions.
Robin Anderson, senior economist with Principal Global Investors, answered the question below. All 13 questions we asked our experts appeared in the Jan. 29 edition of the Business Record.
Read all 13 answers here >>>
How will Iowa and the United States be affected by the market turmoil in China?
The biggest risk coming from China is a significant economic growth slowdown; the Chinese economy is closely connected to the rest of the world via trade.
The Chinese economy has been moving toward a slower pace of growth for some time, and that has consequences for its trading partners. While exports to China only made up 0.8 percent of U.S. gross domestic product in 2014; exports in general have been a growing driver of economic growth, not only for the United States but Iowa too.
According to the Business Roundtable, in Iowa, trade-related jobs grew 4.8 times faster than total employment from 2004 to 2013. The degree to which China’s slowdown weighs on the global economy is increasingly important for the United States and Iowa.
In that vein, movements in the dollar also matter more for the U.S. economy. The dollar’s rapid appreciation against a broad range of currencies last year made our exports relatively more expensive. The stronger dollar hit manufacturing hard in 2015.
With the shale oil boom, commodity prices are increasingly relevant for the United States. Agricultural commodities are always on the minds of Iowans. Chinese growth is closely linked to the cycle in broad commodity prices.
Investment and infrastructure spending fueled double-digit GDP growth in China and led to a global commodity price boom in the 2000s. Rapidly rising prices of copper, iron ore, oil, corn and soy benefited a broad range of commodity-producing regions, ranging from Chile, Brazil, South Africa, Canada, Australia and, of course, Iowa. High prices incentivized commodity producers to build up capacity just as China’s demand growth started to slow.
Now excess supply is putting downward pressure on prices, hitting producers hard. A significant share of the over 70 percent drop in oil prices can be explained by excess supply.
Concerns about Chinese growth, currency movements and commodity prices, in particular the price of oil, may weigh on markets for some time. Uncertainty about how quickly the Federal Reserve will continue to raise rates creates a volatile backdrop for U.S. markets. Stocks have been rising for some time, so multiples remain above their long-term average. Any increase in stock returns will have to come from earnings growth and not from the Federal Reserve’s interest rate policy.