Economic Update: Greater China
ICAEW Economic Update: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.
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Regional outlook dims as US-China trade tensions reignite
- Regional GDP growth seen at 6.0% this year, after 6.5% in 2018.
- China’s growth is expected to weaken further in the second half of 2019 and in 2020 amid the re-escalation of US-China trade tensions, though further policy easing would ease some pressure.
- Hong Kong’s economy is expected to grow at a very slow pace this year amid the gloomy external outlook and domestic political turmoil.
- Macau’s growth is set to slow this year amid a cooling Chinese economy and a stalling gaming industry.
GDP growth in the Greater China region
Global growth momentum in Q2 2019 has weakened, and concerns are mounting for the global outlook as industrial weakness continues and trade tensions flare up once more. A US recession, a sharper slowdown in China, financial market turmoil and a disorderly Brexit remain key risks to the economic outlook. We forecast global GDP to grow 2.6% this year, the weakest in the post-crisis period, while we think next year's growth will also be sluggish. Downside risk to our forecasts has also risen.
China: Escalation of trade war with US to weigh further on growth
The near-term economic outlook remains challenging given the re-escalation of US-China trade tensions, while domestic growth momentum has yet to gain a firmer footing as the impact of policy easing so far has been muted. Indeed, GDP growth moderated from 6.4% in Q1 to 6.2% in Q2, the slowest since 1992 when quarterly GDP growth was first published by the National Bureau of Statistics. Economic activity also slowed again in July after a temporary rebound in June.
Reflecting slowing momentum, growth of industrial value added moderated to 5.6% y/y in Q2 from 6.4% in Q1, and fell markedly to 4.8% in July, the slowest since 2009. Fixed asset investment growth also weakened to 5.5% from 6.2% in Q1, and down further to 5.1% in July. Meanwhile, household consumption growth decelerated to 5.4% from 5.8% in Q2, and real retail sales growth fell to 5.7% y/y in July from 6.5% in Q2.
China: Key cyclical indicators
Although goods exports rebounded to grow 3.3% y/y, after a decline in June and Q2 as a whole, we remain downbeat on the outlook given weak global data and the latest escalation of trade tensions with the US.
The less gloomy outlook largely has to do with the trade war between the US and China that escalated dramatically. In early August, the US announced plans to impose 10% tariffs on $270bn imports, implemented in two batches on 1 September and 15 December.
In retaliation, China announced additional 5%−10% tariffs on US$75bn of US products, also implemented in two batches on the same dates. In addition, tariffs on US cars (25%) and car parts (5%) will also be reinstated on 15 December after having been suspended during a détente early this year.
Not to be outdone, the US administration responded by further raising the impending September and December tariffs to 15% from 10%, and the existing tariffs on US$250bn Chinese imports to 30% from 25%, starting from 1 October.
We expect China to retaliate further. Beijing still has room to raise existing tariffs. Another possibility would be to restrict imports of services from the US such as tourism and education.
This tit-for-tat escalation shows how unlikely a trade deal and de-escalation have become. The impact of the new tariffs on China’s economic growth will be sizeable. Even assuming some offset from more policy support, including additional infrastructure spending and monetary easing, we now forecast China’s GDP growth to fall to 5.7% in 2020, down from an expected 6.1% in 2019.
China: Exports to key markets
The People’s Bank of China (the national central bank) also allowed the renminbi to weaken below the 7 mark in early August. While this was clearly in response to the US tariff threat, it is also consistent with a policy to allow the currency to move more in line with foreign currency market pressures. However, we still do not expect Chinese policymakers to be comfortable with sustained renminbi weakening, as concerns remain that it may trigger large financial capital outflows.
China: CNY exchange rate
Hong Kong and Macau outlook
In Hong Kong, GDP fell 0.4% q/q in Q2, and we expect the economy to fall into a technical recession in Q3 as it got hit by a double whammy. Domestic demand and sentiment have been hit hard by the ongoing political turmoil, and the external outlook is further dampened by the re-escalated US-China trade tensions. We revised downward our 2019 growth forecast to 0.6% (from 1.6% previously) and 1.6% in 2020, and the downside risk to the forecast is high.
Macau’s GDP growth slowed to 4.7% y/y in 2018, following a 9.7% expansion in 2017. The slowdown was driven by weaker exports and a sharp contraction of construction investment. We expect GDP growth to ease further this year to 3.
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