The debt crisis that is sapping confidence and growth all over the euro zone is also squeezing the exports that make up a quarter of China's output, threatening to undercut the global economy's strongest engine at a critical time.
Overseas sales by Chinese exporters grew at the slowest rate in almost two years last month, as shipments to Europe slowed and exports to Italy, the new centre of the debt crisis, plunged 18 per cent from a year earlier, according to customs bureau data released Thursday. At the very same time, imports into China soared a more-than-expected 29 per cent on an annual basis.
Analysts hailed the import strength as a sign of robust domestic demand in China, which has been under pressure for years to rebalance its economy in favour of exports from struggling developed nations like the United States, by letting its currency appreciate and through measures to encourage Chinese citizens to save less. Most, though, said the import gain may be temporary.
Indeed, demand in China could soon get a further boost, as pressure mounts on policy makers in the Middle Kingdom to loosen controls on the flow of credit and to cut taxes. But there is pressure to take such steps because China, while not expected to see a "hard landing" from the almost double-digit growth rates it has seen since the global recession, is cooling. Government data earlier this week showed inflation and factory production slowing, and home sales dropping.
"No country is immune from this European crisis, or from any major crisis that happens around the world," Jennifer Lee, an economist at BMO Capital Markets in Toronto. "We already see the slowdown in the numbers. Every country is feeling it."
Some, of course, are feeling it much more than others.
Ms. Lee and others took some comfort in another report Thursday from the U.S. Commerce Department, which showed the trade shortfall of the world's biggest economy shrank 4 per cent in September, as exports and imports both grew, the latter doing so for the first month since May.
Still, while import growth in the U.S. offers hope that demand in Canada's chief export market is "not dead in the water," as Ms. Lee put it, the pace of growth has slowed from a year ago, a reminder that with the U.S. jobs market stuck in a ditch, Americans "cannot be counted on to be the consumers of last resort."
China is picking up some of that slack, but soon may be doing so at a much slower pace as the European crisis erodes confidence and, as Bank of Canada Governor Mark Carney argued this week, threatens a new crunch in global liquidity depending on how euro-zone banks de-leverage.
David Madani, a Toronto-based analyst at Capital Economics, said his colleagues at head office in London are now predicting that a recession in Europe, China's biggest export market, could last "a couple of years."
While Europe accounts for just a fraction of Canada's international trade, which is still dominated by the U.S., the region's troubles are showing up in domestic data.
A third report from Statistics Canada indicated the country ran a trade surplus in September – the first since January – as energy and auto exports continued their bounce-back from a dreadful second quarter marred by Japan's natural disasters and lengthy maintenance shutdowns at oil refineries in Alberta.
Total exports surged 4.2 per cent, with sales to the U.S. increasing by 5 per cent.
Exports to the European Union, meanwhile, fell by 4 per cent.
For Canada, though, it is the indirect channels that matter, like the effects that Europe's troubles are having on the global financial system, and on consumer and business confidence in key export markets like the U.S. and, to a lesser extent, China.
Despite what is shaping up to be a generally positive third quarter, few economists predict a rosy finish to 2011.
Mr. Madani surmises that net trade, the difference between exports and imports, will contribute a whopping 5 percentage points to the third quarter's annualized rate of economic growth, almost completely offsetting the subtraction from GDP growth in the previous three-month period.
The trick, he said, "is to look through that to the underlying trend, and we think the underlying trend is slowing."
With files from Bloomberg News