ICAEW Economic Insight: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.
GDP growth eased to 6.7% in Q2 from 6.8% in Q1 on slower global trade and tighter financial policy since early 2018. Industry growth slowed to 6% in June-July from an average of 6.8% in Q2. Meanwhile, overall credit growth is yet to respond to the recent monetary easing, underscoring the downward pressures going into H2.
Growth of goods export volumes dropped significantly to 2.8% in Q2 from 6.5% in Q1. But a sequential improvement in June and July suggests that global demand remains resilient, although the 4.5% CNY trade weighted depreciation since early June should also have helped Chinese exporters. Looking ahead, we think China’s export prospects remain positive for now, escalating trade frictions with the US notwithstanding.
But the rising trade tensions come at a time when China’s growth momentum is already slowing. Domestically, investment momentum slowed notably in Q2 and July, on weaker infrastructure investment, reflecting Beijing’s efforts to tighten up on financing of local government investment vehicles. Meanwhile, real estate activity has remained remarkably resilient so far this year, with housing sales and, especially, housing starts still expanding briskly in June and July. Nevertheless, given the overall housing policy stance and the impact of financial tightening since early this year, we expect activity in real estate sector to slow in H2. This may be partially offset by a rebound in infrastructure investment, as policymakers shift towards a more active fiscal policy with some easing of financing restrictions on local governments. Moreover, household consumption started H2 on a softer note after the strong Q2 outturn, but we think it should hold up reasonably well over the rest of the year on relatively strong wage growth and a resilient labour market.
Overall, we think that economic growth will be challenged in H2 by the US-China trade conflict and slow credit growth so far this year. But we expect the slowdown to be modest, given still solid overall global demand and some further easing of the macro stance. Following the stronger-than-expected Q2 data, we now forecast China’s GDP growth to slow from 6.7% in Q2 to 6.2% in Q4, averaging 6.5% for 2018 as a whole, before slowing further to 6.1% in 2019.
The US and China have imposed 25% tariffs on $50 billion worth of imports from each other in July and August. The Trump administration also wants to move forward with plans to impose tariffs of between 10 to 25% on an additional $200 billion of imports from China – after a public consultation period ends on September 5. In response to the US tariff threats, China has vowed to retaliate by imposing tariffs on a further $60 billion worth of imports from the US.
The escalation follows a period of tense silence between the two trading partners since early June. Discussions have resumed recently, at a low level, but prospects for significant progress towards de-escalation are weak.
Indeed, the bilateral trade talk on August 22-23 in Washington DC ended without obvious progress made, as a large gap remained between the two sides. In addition to demands regarding the bilateral trade deficit, the US wants China to halt what it sees as unacceptable policies and practices in industrial policy and technology transfer. But China sees its technology and industrial policies as fundamental to its growth and development strategy for the coming decades. It is thus hard to see China’s leadership committing to significant changes on this front.
We think that the likelihood of de-escalation will rise over time, as it depends on signs of significant economic impact in the US, which will take some time to emerge. Meanwhile, our baseline forecast assumes a further escalation of tensions in the coming months with both countries imposing 10% tariffs on $100 billion of imports from each other, on top of the existing 25% tariffs on $50 billion imports. This curbs China’s GDP growth by around 0.1 ppt and 0.4 ppt in 2018 and 2019, with a somewhat smaller impact in the US. However, if trade tensions escalate further, leading to a full-blown US-China trade war, the impact on China’s GDP growth could rise to as much as 0.6 ppt in 2019 and another 0.4 ppt in 2020, although policy easing would mitigate the impact somewhat.
Amid the intensifying trade conflict with the US, China’s policymakers have already taken several steps to shift the emphasis of the macro policy stance towards supporting growth. These include raising liquidity, encouraging lending to small businesses and promising a more active fiscal policy to support infrastructure construction. Moreover, the authorities issued guidelines for asset management products in July that are less strict and more pragmatic than the industry had expected.
These steps and announcements reduce uncertainty about the policy stance and probably provide a floor for growth. However, in our view, they do not imply a major shift in the macro stance towards significant stimulus. With Q2 GDP growth still 6.7% y/y and the target of 6.5% for 2018 as a whole in reach, there is no mandate for large stimulus measures at this point. Also, the deleveraging campaign of the last two years has helped stabilize the debt to GDP ratio and reduced financial risks. We think the leadership would not want to risk jeopardizing these achievements. In fact, recent statements and announcements suggest that, in spite of the greater attention to growth, policymakers remain committed to deleveraging. Therefore, we do not envisage major stimulus in H2 unless the external environment worsens substantially, for instance because of the outbreak of a full-blown trade war with the US.
In Hong Kong, GDP growth slowed to 3.5% year-on-year in Q2 from 4.7% in Q1, on softening momentum in private consumption and exports. But consumption in H1 as a whole remained in rude health. Going forward, we expect private consumption to continue to be underpinned by the tight labour market, though higher interest rates – we expect two more Fed rate increases this year and two in 2019 – will weigh on domestic demand and house prices. Meanwhile, we expect the economy to feel the pinch of slower external demand in H2, mainly because of cooling import demand in China. Also, rising US-China trade tensions remain a key risk to Hong Kong’s export outlook. That said, most of the impact from trade tariffs will be felt in 2019. Overall, we maintain our GDP growth forecast at 3.6% in 2018, after 3.8% in 2017.
Following a stronger-than-expected H1 outturn, Macau’s economy is on course to cool in the second half of this year on slower growth in China. Growth of gaming revenues slowed to 10.3% in July from 17.6% in Q2 and 20.5% in Q1. We expect it to ease further over the rest of the year on unfavourable base effects, while there are also possible headwinds from a clampdown on capital outflows from the Mainland amid intensifying US-China trade tensions and a weakening CNY. Domestic demand, investment momentum in particular, remained weak, but we expect private consumption to continue to be supported by a solid labour market and an improving property market in H2. Overall, we forecast Macau’s GDP growth to average around 5% this year, after 9.1% in 2017.
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