The Unexpected China Offset

Stop me if you've heard this one: China is slowing, and that spells trouble for the world economy. I'm going to go ahead and presume the vast, vast, majority of readers are familiar: A slowdown in Chinese economic activity has been feared for years and was an enduring concern in 2015. Investor anxiety surrounding the world's second-largest economy was widely blamed for a mid-year global equity market correction. But in an interesting twist, while China slowed, the eurozone-which many consider an economic quagmire to this day-sped. And, given the eurozone's larger aggregate GDP, the acceleration has more than made up for a slower China in the last two years.

Fears of a seemingly unending European malaise the last several years suddenly faded this summer as China's fast growth slowed. Facts were inconvenient- it didn't seem to matter much that:

1. The slowing was largely government-orchestrated and has been occurring for years.

2. The slower pace of growth was actually adding a similar amount to global economic output as earlier years with hot growth rates, given the growth was now off of a larger economic base.

Said differently, fears of China's economy falling apart seem based on a false premise and lack a surprising fundamental deterioration-the hallmark of a correction.

In our view, going largely unnoticed, however, is something rather bullish. Don't look now, but accelerating eurozone GDP growth is actually offsetting the decelerating pace of growth in China-effectively the opposite of what occurred several years ago.

Exhibit 1: China and Eurozone GDP Growth Rates (Year-Over-Year)

Source: Fisher Investments Research, World Bank, Q4 2012 - Q3 2015.

Maybe it's because the eurozone is a collaboration of 19 countries, but many don't seem to appreciate that, in aggregate, it's the second-largest economic zone in the world. At $13.4 trillion in nominal GDP, the eurozone accounts for ~17% of global output. Hence, every additional percentage point of growth adds approximately $134 billion to global GDP. At $10.3 trillion or ~13% of global GDP, China adds $103 billion for each percentage point of growth.

Exhibit 2: China and Eurozone Dollar Value of One Percentage Point of GDP

Source: Fisher Investments Research, World Bank. Dollar contribution based on nominal figures as of 2014.

China's growth has slowed from 7.8% in 2012 to 7.3% last year. This year, it is possible China will log 6.8% growth, a full percentage point reduction from three years earlier. But note: In 2012, eurozone nominal GDP grew only 0.4%. In real terms, it spent two years contracting. On a nominal basis, it has since ticked up to 1% in 2013 and 1.8% last year. In 2015, growth has been quicker. This effectively means the much-maligned eurozone is picking up the slack from China, plus some. While this is all a measure of past activity, the fact sentiment doesn't appreciate this offsetting effect is bullish for global stocks. As investors take notice of this underappreciated positive fundamental driver, sentiment should warm and boost stocks further up the wall of worry.