Air Pollution in China Signals Potential Economic Growth Rebound

A recent analysis by DataTrek Research suggests that increasing air pollution levels in China's five largest cities may be an early indicator of economic growth. While higher pollution levels are detrimental to public health, they historically correlate with an uptick in economic activity. China has experienced decelerating economic growth over the past few quarters.

According to Nicholas Colas, co-founder of DataTrek Research, China's slow recovery from the extended pandemic-related shutdown became evident in the air pollution readings before appearing in official economic data. As more factories ramp up production, travel and consumption increase, leading to heightened pollution levels and deteriorating air quality.

Recent air-quality data from major Chinese cities, including Beijing, Guangzhou, Chongqing, Shenzhen, and Shanghai, indicate an uptick in air pollution, suggesting a potential economic recovery.

While the current pollution levels are cleaner than those seen in 2019, they are notably higher than in recent months. It may take some weeks for this increase in air pollution to reflect in official economic data, but if it does, it could signal a "synchronized economic expansion."

Nicholas Colas speculates that rising air pollution in China could lead to higher oil prices in the coming months as the country's economy rebounds. This potential scenario could particularly benefit US large-cap energy stocks as China's economic activity increases.

While Brent crude oil prices surged during the summer and approached $100 per barrel in September, they have since retreated and were trading around $86 on Monday.

The connection between air quality and economic growth highlights the intricate relationship between environmental factors and financial markets.