When Australia’s central bank released its quarterly economic update last week, China’s “uncertain” economic outlook topped a list of domestic worries for Australia.

The International Monetary Fund too singled out China in its latest world economic outlook as among the “downside” tilts to its balance of risks.

The recovery of the world’s second-biggest economy from the Covid pandemic was faltering, “with cross-border spillovers” likely if it slowed, the IMF said.

Wednesday brought further confirmation of China’s disappointing performance as the economy slipped into deflation for the first time since late 2020.

China’s trends have been out of sync with those of richer nations for some time.

Producer prices, for instance, have been falling for the past 10 months, and now consumer prices have also turned negative compared with a year earlier.

Unemployment, particularly for younger people in cities, has also been on the rise, topping one in five in recent months and reaching a record high.

Real estate prices continue to slide despite recent rate cuts, whereas property values in nations such as Australia are rising even as the central bank there lifts interest rates.

How China’s economy fares will have a major bearing on the fate of countries that rely on it as their biggest trading partner. That club includes most if not all of east Asia, as well as Australia and New Zealand.

When China on Tuesday reported weaker-than-expect trade figures for July – including a nearly 15% fall in exports – iron ore prices were among those to take a tumble.

The world’s farmers also have reason for concern. Cotton imports by China have dropped to their lowest in five years, Rabobank’s research arm notes, citing US data, as exports of garments and footwear fall.

The IMF and others are still expecting China’s GDP to expand 5.2% this year and 4.5% next. But a slowing Chinese economy could pull the global economy “in competing directions”, says Harry Murphy Cruise, an economist with Moody’s Analytics.

“In the short term, falling prices in China help in the global fight against inflation,” he said. “This makes central banks’ job a smidgen easier, shaving some interest rate hikes off the top of their tightening cycles.”

Good news, in other words, for mortgage holders on variable rates from Melbourne to Manchester.

But “a lacklustre recovery from China would squash global growth in the medium term”, Murphy Cruise said.

“In downturns past, we’ve often looked to China to be an engine of this growth,” he said. “As China battles with structural concerns in its property market and a limping transition to consumer-led growth, this driver may not be there to support to the same extent this time.”

Chinese authorities, though, are unlikely to sit idle, not least because the Communist party has staked much of its authority to the nation’s steep climb to a global economic dynamo.

As the Reserve Bank of Australia noted in its quarterly statement on monetary policy, China’s central bank has already cut two key interest rates – albeit by a modest 10 basis points.

Policymakers will want to break the deflationary cycle before it takes hold – as it did in Japan after the asset price bubble popped in the early 1990s. If not, consumers will pare back spending even more on expectations that prices will fall further if they wait.

Murphy Cruise is among economists who don’t expect China’s deflation to linger as government efforts to spur tourism, car sales and even renovations gain traction.

But should those measures fail, expect some of China’s surplus production capacity to swivel towards export markets.

China had already overtaken auto exports of South Korea by 2021 and Germany a year later. World leader Japan is now within range, Moody’s will detail in an upcoming report.

“In June 2023, China’s auto exports grew more than 50% from a year earlier,” Murphy Cruise says.

Any further export growth might squeeze out competitors, particularly in the fast-growing electric vehicle segment, prompting a response.

A slowing Chinese economy, in other words, is a multi-edged sword.