This is the title of a fascinating new report by TD economics. I have long warned that the possibility of a hard landing in China remains the greatest black swan event for the Canadian (and world) economy.
...The Canadian economy would be quite vulnerable (to a hard landing in China). Given Canada’s modest exports to China, the direct impact on trade would be limited. However, there would be enormous indirect effects. First, a dramatic slowing in China’s economy would be a blow to the world economy. Indeed, a global recession would be a material risk. Second, China has had an enormous impact in raising commodity prices in recent years. A hard landing in China would spark a substantial commodity correction. The risk scenario presented is one where China’s economic growth falls to 5% in 2012 and then edges back up to 7% in 2013.
Under this scenario, world economic growth would be almost cut in half to 2% and commodity prices could fall by 30-40%. This would shave 1.0 to 1.5 percentage points from Canadian economic growth. It would also impact commodity-rich provincial economies the most. The analysis shows that Canada’s economic fortunes are deeply tied to developments in China.
Let’s remember that China’s freakish economic growth has been 60% fueled by construction……in some cases construction that has led to the building of entire empty cities.
This is one of the main reasons why I have predicted that industrial commodities may fall hard at some point in 2011. The implications for the commodity heavy TSX are clear.
China is absolutely the nation to be watching closely, particularly as they attempt to quell inflation without crushing their own economy, a tightrope act for sure.