WhyItMatters

Technical recession looms

An employee working on car assembly line at a factory in Beijing.
An employee working on car assembly line at a factory in Beijing.PHOTO: REUTERS

Investors have endured another roller-coaster ride on global equity markets this week as weak factory data from China reignited fears that the world's second-largest economy is slowing more than expected.

The latest round of sell-offs was triggered by China's official manufacturing Purchasing Managers' Index for last month, which fell to 49.7 from 50 in July, marking its lowest level since 2012.

A reading below 50 implies contraction.

When China put out disappointing manufacturing data last month, it sparked a global stock market rout so savage that the incident was christened "Black Monday".

The Shanghai stock market is somewhat decoupled from the real economy, but volatility there is seen as a worrying indication of Beijing's struggle to manage structural changes.

Markets are reacting badly again but less so, which could mean traders and investors have adjusted their expectations about China's outlook.

While it remains to be seen if the reforms and stimulus measures implemented by Chinese policymakers will be successful, the consensus now appears to be that the Chinese economy is indeed slowing significantly, which means global growth is sputtering on one engine - the United States.

The US economy continues to add jobs at a healthy clip while maintaining an unemployment rate way down from where it was during the darkest days of the financial crisis. However, this nascent recovery has not been enough to lift the whole world. Manufacturers and exporters in Asia are still suffering from tepid global demand.

Investors can expect more turbulence and volatility as markets continue to express uncertainty over the outlook for China and the timing of the impending US interest rate rise.

These uncertainties are also expected to continue weighing on growth in the region and in Singapore, where some economists say there is a growing risk of a technical recession.

A version of this article appeared in the print edition of The Straits Times on September 03, 2015, with the headline 'Technical recession looms'. Print Edition | Subscribe