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Chart of the Week

Weekly chart using economic data to address timely market topics from the Wells Fargo Investment Institute Global Investment Strategy team.

May 24, 2022

China’s economic slowdown has global implications

This chart shows a sharp drop in the past two months in economic activity in China’s manufacturing industries and services industries, based on respondents to an IHS Markit survey. The chart starts in 2020 with respondents reporting expanded activity, and it ends in April 2022 with two months in contraction territory. Services activity has dropped more than manufacturing activity the past two months.Sources: IHS Markit, Inc. and Wells Fargo Investment Institute. Data as of April 30, 2022. This chart was excerpted from the Asset Allocation Strategy Report (May 16, 2022).

COVID-19 takes its toll on China’s economy

China’s economic slowdown is setting the tone for Asia. The government has locked down major cities, like Shanghai, as part of its COVID-zero policy, and as a result, industrial output and retail sales have fallen the past two months while the unemployment rate increased to 6.1% in April. Factory shutdowns have put additional pressure on already existing global supply-chain disruptions.

The chart shows that both services and manufacturing industries in China have been in contraction territory since March, the weakest levels recorded since the early days of the pandemic in early 2020.

What it may mean for investors

  • We believe China’s government lockdown is likely to weigh on aggregate emerging market economic growth, while also aggravating supply-chain disruptions and inflation around the globe.
  • On May 18, we raised our 2022 year-end target for global inflation to 6.2% (from 5.4%) and lowered our target for global gross domestic product (GDP) growth to 2.5% (from 3.0%). We also lowered our target for emerging market GDP growth to 3.2% (from 3.8%). We remain unfavorable on Emerging Market Equities and prefer U.S. Large Cap and U.S. Mid Cap Equities over international stocks.

Risk Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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