China economy set to sink further, with US trade war
China economy set to sink further, with US trade war and pork crisis to drive record low growth lower still
A miserable three months for China's economy was capped by the lowest growth on record on Friday, and the expectation that with darkening storm clouds on the horizon, things are likely to get even worse.
In the third quarter of 2019, China's economy grew by 6.0 per cent, the slowest rate since quarterly records began 27 years ago and worse than expected. It means growth is now on the floor of Beijing's target range of between 6.0 to 6.5 per cent for 2019. Most analysts expect it to stay within the target range for the year as a whole, but many think it will dip below 6.0 per cent in the final quarter.
"Actually we still believe the actual growth slowdown might be worse than the headline official numbers," said Nomura analysts, emphasising the pessimism that is now widespread with regard the world's second largest economy.
While the material difference in a percentage point or two of economic growth is scant, for Beijing the symbolism is huge. A strong economy is often offered as the justification for the Communist Party's non-democratic governance of the Chinese people.
At a time when the country is fighting to contain a pork crisis that is hitting citizens in the pocket and a trade war with the United States which is hacking away at factory output and exports, the government is under pressure to ensure it delivers on its promises.
"We think they are still on track to meet the lower end of the target range for 2019, around 6.1 per cent. Growth for 2020 will be solidly below this, around 5.8 per cent," said Carlos Casanova, Asia-Pacific economist at insurer Coface. "The question remains: why is China not doing more to boost growth?"
Casanova's forecast is in line with that of the International Monetary Fund (IMF), which earlier in the week said the US-China trade war was the biggest risk to the global economy, urging both parties to make a deal as soon as possible. A deal may offer some respite to both sides " especially if it leads to the postponement of tariffs on the remainder of Chinese goods, due to come into force in December.
These tariffs, if they are not delayed, will exacerbate China's economic woes significantly. Research firm Oxford Economics said growth could sink to 5.7 per cent in 2020, excluding the impact of the December 15 tariffs, which will hit Chinese consumer goods like smartphones and televisions for the first time.
We think they are still on track to meet the lower end of the target range for 2019, around 6.1 per cent. Growth for 2020 will be solidly below this, around 5.8 per cent. The question remains: why is China not doing more to boost growth?Carlos Casanova
"Right now we are seeing the impact of previous tariff tranches, which were already pretty high and covered many products exported to the US," said Tommy Wu, senior economist at Oxford Economics. Should the next round of tariffs come into place in December, Wu said gross domestic product (GDP) growth could fall to as low as 5.5 per cent in 2020.
However, the trade war is just one of the many challenges facing China's economy. Friday's data released by the National Bureau of Statistics in Beijing showed that net exports now contribute less than one-fifth to China's economic growth, when they were previously one of the engines that powered its decades of double-digit economic growth, along with investment. Even without the trade war, Coface's Casanova said, China's economy still would have grown at an underwhelming 6.3 per cent in the third quarter.
Now, with consumption contributing 60 per cent to GDP, many of the challenges are domestic. Retail sales figures released on Friday accelerated modestly to 7.8 per cent from 7.5 per cent the previous month, but remained below the growth rates earlier in the year and well below the double-digit rates from previous years. Concerns over Chinese domestic demand had already been borne out by an 8.5 per cent drop in September's imports, Chinese customs data showed earlier this week.
Consumers are also being hit by the African swine fever epidemic which will now roll into 2020. Pork output accounts for around 1.0 per cent of the Chinese economy and Nomura expects it to drop by 40 per cent in the final quarter of this year, after a 23 per cent collapse in the third quarter due to the disease ravaging China's pig population.
This alone would shave a fraction from the final economic growth figure of the year, with the Chinese consumer paying a higher price for the country's most popular meat as a result.
"The decline in the pig supply that has already taken place suggests that by early next year, pork price inflation will probably have doubled again from September's 11-year high, weighing on consumer confidence and real incomes," said Martin Lynge Rasmussen, an analyst at Capital Economics.
Employment numbers for September, also released on Friday, were steady, but analysts fear that the more economic growth slows, the greater the risk of job losses.
"One thing that the Chinese government worries more about is not the speed of growth, but employment," Wu from Oxford Economics added. "If GDP growth gets too slow, then it's actually more difficult to maintain employment levels."
Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.
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