Weekly Economic Briefing: China’s growth challenges persist as the Year of the Pig begins

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

China’s growth challenges persist as the Year of the Pig begins

This year’s Lunar New Year holiday coincides with a period of continued uncertainty for the Chinese economy – with the ongoing US-China trade conflict taking a toll, and growth slowing across key sectors including consumer spending, business investment and exports (see chart).

For Australia, a slowing China is, of course, a particularly big risk. And it’s not just about our exports of iron ore and coal. China is also our largest market for overseas tourists and students, a major destination for agricultural exports, and a significant source of inbound investment.

Chart: Key Chinese economic indicators, annual growth

Source: Haver Analytics. Note: Goods export series is smoothed.

The trade stoush with the United States has certainly complicated the task of economic management for the Chinese authorities. They are comfortable with economic growth gradually slowing as they put more emphasis on sustainable and consumer driven growth, and try to reduce the number of inefficient firms and the dangerously large pile of corporate debt. But they are not comfortable with growth slowing ‘too quickly’, so the slowdown that has been evident since mid-2018 has prompted the unleashing of a round of mini-stimulus measures aimed at shoring up economic growth.

They have done this in essentially two ways. First, they are encouraging bank lending to the private sector, particularly to small and medium-sized businesses, to stimulate business investment. And to support this, bank reserve requirements have been cut, thereby increasing the amount available for lending. Meanwhile, taxes and fees for business have also been reduced.

The second form of stimulus is coming from government spending, particularly on infrastructure. Since December, China’s National Development and Reform Commission (NDRC) has approved 16 infrastructure projects with a total value of 1.1 trillion yuan, or US$163 billion. This represents a tenfold increase in the volume of infrastructure projects initiated compared to the 12 months prior to December.

To date, the slowdown in China’s activity has been, paradoxically, a net positive for Australia – precisely because the authorities’ economic stimulus has promoted higher infrastructure spending and, as a result, higher demand for the steel inputs of iron ore and coal. Those higher commodity prices are boosting income growth and Commonwealth revenue collections (supporting the expected return to surplus in 2019 20).

But this silver lining comes with a dark cloud. The stimulus measures, driven as they are by higher public and corporate debt, are pulling in the opposite direction of China’s path towards more sustainable growth. That leaves China with elevated longer-term economic risks. The longer the ongoing trade dispute with the US – with another round of US tariffs pending the outcome of current negotiations between the two countries – the greater the likelihood that China resorts to using more debt to fuel growth. That would be a real concern.
China’s tricky current economic situation is also occurring at the same time as its working age population peaks, presenting its own set of challenges for continued economic growth. How China handles its current economic headwinds, as well as these longer-term challenges, remains the million-yuan question.

For more information on the Australian brief, please contact co-authors David Rumbens and Ben Guttman.

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to & view previous editions at: https://blogs.deloitte.co.uk/mondaybriefing/

  • The latest Deloitte survey of UK Chief Financial Officers released today shows that uncertainty over Brexit is driving a marked shift towards defensive strategies among British businesses. With the UK’s growth prospects heavily dependent on the so far uncertain nature of its exit from the EU, corporates are cutting back on capital expenditure and hiring. Cost reduction is the top priority for CFOs who are placing a greater emphasis on it now than at any time in the last nine years.
  • CFOs continue to be pessimistic about the long-term effects of Brexit, with more than three-quarters expecting it to lead to a deterioration in the business environment. Domestic risks seem to be the dominant concern for CFOs, Brexit rated as the biggest threat to business by far, followed by greater US protectionism and weak demand in the UK. Despite slowing global growth leading to a weaker external environment, CFOs rate emerging market and euro area weakness among the bottom three risks to their businesses.
  • After a long period of easy access to cheap credit, funding conditions have begun to tighten for the large corporates on our survey panel. CFOs report that the cost of credit for their businesses has risen to its highest level in almost six years and availability has dropped to a two-year low. Rising interest rates have also brought a renewed focus on corporate leverage. For the first time in eight years, a net balance of CFOs rate UK corporate balance sheets as overleveraged.
  • The survey reveals a divergence of opinion between economists and CFOs on the likely nature of Brexit. The latest consensus growth forecasts suggest that economists expect a transition deal, but corporates are positioned for the hardest Brexit, with risk appetite at recessionary levels and an intense focus on cost control. Businesses seem to be increasingly pricing in a worst-case outcome. Anything better, including a delay or a deal, could deliver a Brexit bounce in sentiment.
  • To read the full report and download the survey data please click on the link below: https://bit.ly/2TyirfG

PS: In last week’s briefing we highlighted the risk posed by Italy’s high level of government debt, yields on which rose sharply last year. Italy’s populist coalition government is committed to boosting public spending but had to scale down its plans to avoid EU sanctions for breaching European budgetary rules. Now, with the latest economic data showing that Italy was in recession in the second half of last year, its government is likely to face increased pressure to raise spending, which could further strain its relations with the EU.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 3.1% at 7,020. Global equities rose on a dovish statement by the US Federal Reserve, suggesting that US interest rates will be staying on hold. UK blue-chip stocks were also supported by a fall in sterling, which inflates the value of overseas earnings.

Economics and business

  • The US Fed puts further interest rate rises on hold, citing risks to global growth and weaker inflationary pressures in the US
  • The US economy added more jobs than expected in January and maintained robust wage growth despite the partial government shutdown
  • US manufacturing activity rebounded in January, beating expectations after a sluggish end to 2018
  • Euro area GDP grew by just 1.2% year-on-year in the fourth quarter, the slowest rate of growth since 2013
  • Euro area business confidence fell to a two-year low in January
  • The US charged Chinese tech firm Huawei with corporate espionage, wire fraud, the obstruction of justice and other crimes
  • UK fintech company World First discontinued its US operations to prevent US regulators from stopping its £700m takeover by China’s Ant Financial
  • UK consumer borrowing rose at its slowest pace since 2014 last year
  • UK house prices remained flat in January, according to the Nationwide House Price Index
  • The EU has accused eight banks of collusion in the trading of euro area government bonds since 2007
  • UK high street bank branches suffered more net closures than any other type of retailer last year, bank branch transactions also fell 23% and digital transactions increased by 99%

UK wine retail chain Oddbins has gone into administration, blaming tough high street conditions and economic uncertainty created by Brexit.

Brexit and European politics

  • UK factories are stockpiling inputs at the fastest pace since survey began nearly three decades ago, according to IHS Markit
  • Prime Minister Theresa May sets out to renegotiate the Irish border backstop with Brussels following discussions with MPs
  • Nissan reversed its decision to build the new X-trail at its UK plant in Sunderland. The company cited the decline in diesel sales as reason for the change of plan and said that Brexit uncertainty was “not helping” business planning
  • European Council president Donald Tusk said the EU is not willing to negotiate a change to the UK’s withdrawal deal
  • European president Jean Claude Juncker said the UK’s attempt to renegotiate with little time left risks a disorderly Brexit and the EU ought to “prepare for the worst”
  • The UK Parliament voted down the Yvette Cooper amendment that would have allowed an extension of Article 50 if a deal weren’t reached by the end of February
  • Research by the UK’s Institute of Directors found that a fifth of their members have set up overseas operations as a result of Brexit
  • Federal Reserve chairman Jerome Powell said the central bank is monitoring Brexit and a no-deal scenario would have an impact on the US economy

And finally… a type of durian fruit, known for its rarity and pungent smell, the J-Queen, is on sale in West Java, Indonesia for 14m rupiah, roughly three times the average monthly salary – fruit of labour.


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