As China’s economy slows, why the world should care
China’s economic growth is sputtering. The official forecast of six percent to 6.5 percent is the slowest on record, and the 6.2 percent growth actually reported in the second quarter is the weakest since the government began releasing quarterly data in 1992.
The most obvious and recent cause is the trade war with the US but the impact is global, with knock-on effects on companies and countries all over the world, Bloomberg wrote.
What explains all the worry?
China’s $14 trillion economy, second in size only to the US, accounts for almost a third of global growth each year. That makes it a vital driver of job creation and improved living standards everywhere. The advanced age of the US expansion — more than a decade — and worries about growth in Europe make China’s pace of continued growth that much more important. If China’s current slowdown were to suddenly accelerate, the ripple effects could squelch the global recovery. A slowdown is structural — something that’s expected to happen over time. But a plunge defies expectations and is therefore far more disruptive.
What’s wrong with six percent?
In one respect, nothing, since it’s more than twice the global rate. But China’s economy is loaded up on debt and its ability to service repayments depends on rapid growth to generate the profits and tax revenues needed.
Slower growth challenges China’s ability to stem the buildup of its government, corporate and household debt — which according to Bloomberg Economics is on track to add up to more than 300 percent of gross domestic product by 2022. The bigger that debt pile becomes, the bigger the impact on global growth should it all go sour.
Plus, growth is set to slow further and could even slip below six percent without more aggressive stimulus — something Beijing has been leery of trying for fear of sparking a financial blow-up.
How’s the slowdown being felt?
It has impacted everything from factory output to the jobs market. Deflation is looming after China’s producer price index slowed to zero in June from a year earlier, the weakest reading in almost three years. Slower consumer spending has hit multinational companies including Apple Inc. and Prada SpA. Starbucks Corp., which was opening a new store in China every few hours, saw its same-store sales growth begin to slow in 2018. The trade war is hurting exports as US tariffs bite and is causing imports not only from the US to plunge, but also those from Japan and South Korea — illustrating how the battle is reshaping global commerce.
How bad could it get?
With no resolution in sight for the US-China trade war, things will probably get worse before they get better. Business confidence and activity is looking shakier across the globe. Second-quarter GDP in export-reliant Singapore, a bellwether for global demand, shrank the most since 2012. Across Asia and Europe, factory activity shrank in June, while the US showed only meager growth, according to purchasing managers’ indexes.
Meanwhile, rising tariffs have led companies to move some production out of China to countries such as Vietnam. As of mid-July, all 10 of the gauges tracked by Bloomberg to assess the health of global trade were below their average midpoint, including four below their long-run normal ranges, and the balance threatening to join them.
Why is China growth slowing?
Aside from the trade war, simply because such a breakneck pace of growth can’t continue forever. As the population ages, there are fewer working-age adults to drive output. There are fewer easy investment opportunities, like building missing infrastructure. And the debt overhang means more activity has to go to paying back the spending of the past. Other drags are President Xi Jinping’s ‘critical battles’ to reduce China’s massive debt pile and clean up toxic air pollution. Retail sales, long a pillar of the economy, aren’t growing at the pace seen in years past either. The auto industry last year posted its first drop in annual sales in nearly three decades.
What’s China doing?
Trying to walk a fine line. The fire-hose stimulus that followed the global financial crisis kept China from a Great Recession like the US suffered but swelled the debt mountain. Now it’s trying to do just enough to prevent a hard landing — where the economy flat-lines or flirts with recession — while avoiding another debt buildup.
A fiscal stimulus plan including about ¥2 trillion ($291 billion) of tax cuts is slowly feeding through into the economy. The government has eased the rules for using government debt in some infrastructure projects and pledged to renovate hundreds of thousands of old buildings.
The People Bank of China has also requested banks to not lower mortgage rates further, despite easier monetary conditions. It’s also boosted credit support for small firms, increased liquidity for smaller banks and asked big lenders to sustain funding to avert a squeeze. In June, the top economic planner unveiled a stimulus plan to help spur demand for automobiles and electronics.
Greek PM says 2020 budget will respect fiscal targets
Greece will submit a 2020 budget later this year that will fully respect the fiscal targets agreed with its lenders, newly elected Prime Minister Kyriakos Mitsotakis said on Saturday.
Outlining his main policies after a landslide victory in a July 7 election, Mitsotakis told Greek lawmakers that the budget would not put fiscal targets for 2019 and 2020 at risk, Reuters reported.
Greece emerged from economic adjustment programs overseen by its lenders last August but still needs to meet fiscal targets, including a primary budget surplus — which excludes interest payments on its debt — of 3.5 percent of annual economic output up to 2022, which many consider unrealistic.
“In the draft budget for 2020, the given fiscal balance is not disrupted and the primary surplus targets for the years 2019 and 2020, agreed by the previous government, are not disputed,” Mitsotakis said.
Mitsotakis, who takes over from former leftist prime minister Alexis Tsipras, was elected on a pledge to cut taxes and speed up investments to spur growth in a country which lost a quarter of its output during the Greek debt crisis.
He said that planned tax cuts and bold reforms of the economy and public administration would lead to higher growth and help Greece convince its lenders to lower fiscal targets after 2020.
“In 2020...we will have the ability to seek the lowering of primary surpluses to more realistic levels,” Mitsotakis said.
Corporate tax will be cut to 24 percent on 2019 profit from 28 percent currently and taxation on dividends will be halved to five percent, he said, adding that a highly unpopular property tax that was introduced in 2012 at the height of the crisis will be cut by an average 22 percent this year.
One urgent matter facing Mitsotakis’ cabinet is the shoring up of key state-controlled utility Public Power Corp. (PPC), which is saddled with more than €2.4 billion of arrears from bills left unpaid during the debt crisis.
Mitsotakis said that PPC, which is 51 percent owned by the state, would be revamped through the privatization of its networks and identification of habitual defaulters, before a strategic investor is sought for the utility.
The new conservative government, which investors consider to be more market friendly than its predecessor, also plans to relaunch the sale of Helleneic Petroleum (HEPr.AT), the country’s biggest oil refiner, and push ahead with a 8-billion-euro investment plan for the disused Hellenikon airport which has been beset by years of delays, Mitsotakis said.
“Hellenikon will soon become the symbol of a new Greece of...extroversion and innovation,” he said.
Singapore woes ring trade alarm bells
A plunge in exports and the worst growth rates for a decade have fueled concerns about the outlook for Singapore’s economy, with analysts saying the figures offer a warning that Asia is heading for a slowdown as China-US tensions bite.
While it may be one of the smallest countries in the world, the export hub is highly sensitive to external shocks and has long been viewed as a barometer of the global demand for goods and services, AFP reported.
The affluent city-state is highly dependent on trade and has traditionally been one of the first places in Asia to be hit during global downturns — with ripples typically spreading out across the region.
The latest signs are not good. In June exports collapsed 17.3 percent from a year earlier, the fastest decline in more than six years, led by a fall in shipments of computer chips.
That followed a shock 3.4 percent quarter-on-quarter contraction in GDP in the second quarter. Year-on-year growth came in at just 0.1 percent, the slowest pace since 2009 during the global financial crisis.
“Singapore is the canary in the coal mine,” Song Seng Wun, a regional economist with CIMB Private Banking, told AFP.
“And what it tells us is that it is a tough environment.”
To warn of danger, miners used to bring caged canaries underground with them as the birds would die in the presence of even a small amount of poisonous gas — signaling to workers that they should make a swift exit.
While steadily weakening growth in China is partly to blame for a slowdown in exports, analysts say the trade war between the US and China, the world’s two biggest economies, has dramatically worsened the situation.
Beijing and Washington have slapped each other with punitive tariffs covering more than $360 billion in two-way trade.
No winners in trade war
While Singapore — a transit point for products heading to and from Western markets as well as the Asian base for manufacturers of some hi-tech goods — may be showing the strain most, negative data has emerged throughout the region.
Exports have been slipping across Asia. In India they plummeted 9.7 percent in June, in Indonesia, Southeast Asia’s biggest economy, they dropped 8.9 percent in the same month while in South Korea they slipped 10.7 percent in May.
Governments have slashed economic growth forecasts, and gauges in several countries measuring activity in the manufacturing and services sectors paint a bleak picture.
Central banks are moving to spur domestic consumption, with Indonesia and South Korea cutting interest rates Thursday, the latest in Asia to lower borrowing costs.
Singapore’s central bank is seen as likely to ease monetary policy at an October meeting, and some economists are predicting the country could fall into recession next year.
“There are no winners in this trade war. While most of the attention has focused on the trade conflict between China and the US, the damage has not been confined to these two economies,” business consultancy IHS Markit said in a commentary.
“Exports from Asia’s key emerging and advanced countries have taken hits in the first half of 2019.”
Exports in the doldrums
The US-China tensions have upended the complex supply chains that underpin the modern system of global trade.
They have hit Chinese demand for raw materials and other goods that were traditionally sent to the country to be manufactured into finished products and shipped on to other markets, including the US.
In Asia, these range from palm oil from Indonesia to semiconductors from Singapore.
Chinese manufacturers have been forced to curb imports as their own exports to the US have fallen due to the tariffs.
It comes at a time that demand for imports of raw materials in China had slowed anyway as the economy loses steam — it expanded 6.2 percent in the second quarter, its weakest pace in almost three decades.
While Singapore is particularly vulnerable to a slowdown in the global economy, it has traditionally bounced back strongly. After contracting in 2009 during the global financial crisis, the city-state’s economy grew by 14.5 percent in 2010.
But the near future could be turbulent.
Nomura, the Japanese brokerage, said in a note that “Asian exports should remain in the doldrums in (the) coming months”.
South Korea saw the steepest decline in export volume by 6.9 percent, from January to April, from the same period a year earlier among the top 10 exporters, data showed Sunday, according to koreatimes.co.kr.