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Economic Update: Greater China

ICAEW Economic Update: Greater China is a quarterly economic forecast for the finance profession, produced by Oxford Economics.

Slowing external and domestic demand weigh on regional growth

  • Regional GDP growth seen at 6.0% this year, after an estimated 6.5% in 2018.
  • China’s growth will remain under pressure in early 2019 before finding a floor in Q2 in response to the growth-supporting measures.
  • Hong Kong’s growth momentum is set to lose steam this year amid a property market downturn and the gloomy export outlook, with GDP growth expected to slow to 2.2%.
  • Macau’s economy will continue to feel the pinch from China’s economic slowdown. GDP growth is set to slow to 2.8% this year, from an estimated 4.4% in 2018.

GDP Growth in Greater China region

Recent economic indicators show that the manufacturing- and trade-driven soft patch in late 2018 is extending into this year. But we still think that global recession risks remain low. In our baseline forecast we see global GDP growth softening in H1, but with a modest rebound in H2 as Chinese growth stablises and growth in EMs and Europe regains momentum. Overall, we forecast that global GDP growth will slow from 3.0% in 2018 to 2.7% this year, with a similar outcome seen in 2020.

Sharper slowdowns in China, global trade and financial-market weakness, and a disorderly Brexit remain key risks for the economic outlook. But the risk of significant monetary policy tightening in the US has come down and the odds of a renewed flare-up in trade tensions have ebbed lately as the US and China have resumed dialogue.

China: Growth to slow further before finding a floor in Q2

Amid weakening external and domestic demand, China’s economic growth slowed further in Q4 2018 to 6.4% y/y. This brought average growth for 2018 as a whole to 6.6%, after a revised 6.8% in 2017. The slowdown was broad-based, with a sharper deceleration in momentum in the disaggregated expenditure data than the headline GDP figures. Real goods export growth slowed to 2.1% y/y in Q4, after 6% y/y in Q3, reflecting weaker global trade momentum and the impact of the trade tensions with the US . 

China: Exports to key markets

Meanwhile, growth in domestic demand faced downward pressure from weak sentiment and cooling real estate activity. Household consumption also slowed, with real retail sales growth decelerating from 6.5% y/y in Q3 to 6.1% in Q4. This all affected industry, with the expansion of real value added in industry down from 6% in Q3 to 5.7% in Q4 amid downward pressure on producer prices and industrial profits. Neverthless, overall credit growth held up in December, halting the previous downward trend and possibly implying that the monetary policy easing may finally have had some impact.

China: Key cyclical indicators

Following December’s Central Economic Work Conference, policymakers have started to roll out, and announce, an increasing number of monetary and fiscal measures, including a further 100bp reserve requirement rate cut in January, tax cuts and approvals of infrastructure projects. We think that growth will remain under pressure in the coming months and that policymakers will aim to halt the slowdown in growth rather than try to engineer a significant pick-up in growth. 

We expect GDP growth to find a floor around Q2 in response to the growth-supporting measures and to be 6.1% in 2019 as a whole. While our projection may seem benign compared to the fears of many in the financial markets, our growth forecast has been at the bottom of the range of consensus for quite some time, although other forecasters have recently moved closer to us.

One key question mark is the trade conflict with the US. Following the positive signals from US-China trade negotiations, we think that further tariff hikes are likely to be suspended. Although underlying tensions on technology and China’s industrial policy are unlikely to subside any time soon, a substantial tariff suspension would imply an upside risk to growth. Domestically, the key risk is a downside one – that credit growth does not pick up amid weak sentiment and a continued tight stance in relation to shadow banking and local government debt. 

Credit Growth

Hong Kong and Macau outlook

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.

Household consumption and income

Hong Kong and Macau outlook

In Hong Kong, year-on-year GDP growth is expected to have slowed further in Q4 2018 from 2.9% in Q3 2018. Growth momentum is set to lose steam this year amid pressures on both domestic and external fronts. The property market downturn will likely weigh on private consumption. While the influx of mainland visitors as a result of the new transport links could help cushion the softening in retail sales, this is likely to be more than offset by the decline in domestic demand growth. Meanwhile, a slowing Chinese economy and less robust global demand will continue to depress export momentum. And the US-China trade conflict will continue to cloud the outlook, though the current fairly constructive negotiations are a positive. We forecast GDP to expand 2.2% in 2019 following an estimate of 3.4% in 2018. 

Macau’s GDP growth slowed to 1.6% y/y in Q3 2018 following a 7.6% expansion in H1. The slowdown was driven by weaker exports and a continued deceleration in construction investment. We now forecast GDP growth to slow to 2.8% this year, after an estimated 4.4% in 2018. Export momentum is likely to ease further amid a cooling Chinese economy. While we think household consumption should continue to benefit from the favourable conditions for jobs and incomes, we expect investment to remain subdued given weak sentiment and uncertainty over the renewals of casino licences. 

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.