It seems clear that the global economy is losing momentum in 2024. In this loss of momentum, one country stands out, whose growth expectations will be far from reality. China is experiencing a rapid slowdown in its economy, according to several recently published real-time indicators. The “Asian giant” was expected to become the engine of the global economy, recovering from a slower exit from the pandemic and reaching its traditional 5% GDP growth target. However, this now seems impossible. The consensus of Bloomberg is still 4.8% (it has only fallen by two tenths), but experts from JP Morgan is already talking about 4.6% growth at best, while the rest of Wall Street forgets about the 5% target for this year. In an economy of this magnitude, a few tenths can make a significant difference: the world trembles in the face of China’s slowdown.
Weak domestic demand and the perennial real estate crisis are weighing too heavily as the industrial bazooka with which Beijing once again seemed to target the world under the accusation of overcapacity has suddenly bogged down. In short, China’s expectations have deflated like a soufflé, while the world’s other major economic playerThe US is seeking to maintain the policy rate despite constant warnings of an imminent recession. It is precisely from Washington that the straw that will break the camel’s back may come to China: an electoral victory for Donald Trump that would fuel the trade war and sting the faltering Asian “elephant” where it hurts most, in exports that were the only “bright spot”.
From surprise… to fear
The impressive 5.3% growth (a surprise) that the Chinese economy posted in the first quarter of this year has triggered many bullish forecasts from international banks and analyst houses. However, the soufflé seems to be slowly deflating, although revisions are still to be made, as the cascade of cuts to Chinese growth forecasts has already begun. For example, a research note published last week by UBS revised the estimate from almost 5% to 4.6%, as did JP Morgan. “We expect the weakness in real estate activity to have a larger impact on the overall economy than expected, including by further affecting household consumption.”
At Bank of America (BofA), they also got out the sandpaper to correct their projection for this year and next from 5% to 4.8%: growth could slow further to 4.5% over the next two years, compared to a previous estimate of 4.7%, according to a bank report published this week. “We view fiscal and monetary policies as less accommodative than desired and insufficient to reactivate domestic demand growth,” BofA economists write, focusing on the currently ineffective stimulus measures launched by the Chinese authorities to reinvigorate the economy.
The International Monetary Fund (IMF) itself calculated in a document published in 2023 that each percentage point of the rate of change of GDP in China was capable of increasing or reducing the GDP of the rest of the countries (on average) by 0.3 points in the same time. anus. If the Asian economy ends up growing by 4.6%the rest of the countries could lose a little more than a tenth of their momentum. China accounts for 19% of global GDP, The evolution of its economy therefore has a significant impact on the rest of the world. As the “Asian giant” loses its momentum, global growth forecasts for this year (between 3 and 3.4%) could be revised downwards.
Official data show that government spending contracted in the first seven months of the year, while demand for credit remained weak despite lower interest rates. A clear sign that Beijing is failing to find the key as industry grinds to a halt and services begin to falter. faced with consumers who are unwilling or unable to spend and are opting for savings in the face of existing uncertainty: the job market is showing painful cracks among the youngest and many citizens remain trapped by a once voracious real estate market. The sequence translates into a constant threat deflationary that triggers a dangerous spiral.
The timing is delicate, and Chinese local governments are cutting back on spending after the property excesses of previous years. “In an economic downturn, such cuts in local government spending are pro-cyclical and amplify fluctuations and challenges in a context of weak consumption and slowing investment. Aggressive cuts or slowdowns in spending on social services such as health, education and culture raise further questions about the government’s ability to facilitate a more significant recovery in consumer confidence. Even though infrastructure investment remains strong, detailed data show weakness in projects typically led by local governments. In addition, concerns that local governments will raise unconventional revenues are hurting business confidence,” BofA notes.
The last big disappointment was in services. The sector, which had shown relative resilience, is also losing momentum. This week, a private survey (the Caixin PMI) showed that services activity grew less than expected in August due to increased competition and companies cutting prices to maintain market share.
Industry is blocked
Official data released Monday confirms this broad picture. China’s official manufacturing PMI entered contraction territory for the fourth consecutive month in August, suggesting that industrial output momentum is slowing further. Both the official and Caixin PMIs suggest that producer prices have fallen further amid weak demand. The official non-manufacturing PMI also remained weak, even after accounting for summer vacation spending.
The other big disappointment came in the aforementioned industrial sector. The images of the great Chinese ships carrying Thousands of electric cars on their way to Europe They have shown productive vigor that put Western authorities on alert and brought back headlines about China flooding the world with cheap goods. But suddenly, something “clicked.” “We are increasingly convinced that the rebound in the sector and the accumulation of inventories in the first half of 2024 were a hoax,” says market strategist Andreas Steno Larson, formerly of Nordea, in his latest analysis.
“Judging by the export and activity figures in China, we have witnessed a major deception with the accumulation “We had a boost in exports and manufacturing before the tariffs, and now we are on the other side of that anticipation, meaning both are normalizing/regressing at a rapid pace,” the expert explains, referring to the battery of tariffs on Chinese products announced in the United States by the Biden administration, promised by Trump during the election campaign and applied by Brussels to electric cars.
Return to ‘bright spot’ for exports China’s export recovery began in the fourth quarter of last year and has since accelerated, consistently outperforming the region in recent months. “Analysis indicates that the price competitiveness of Chinese products is one of the key factors in the recent export boom. But we believe this impressive price-driven momentum has likely peaked, especially since it has come at the expense of unsustainable margin compression for exporters, and prices could ultimately rise due to tariffs in the coming quarters,” they explain. from Oxford Economics.
The economy is shutting down
“China has suddenly stopped and this is probably a wake-up call for the outlook for the manufacturing sector,” says Steno Larsen, backing up his argument with some pretty telling data. On the one hand, copper exports, which have reached a historic peak in May/June close to 250,000 tonneshas since fallen below 150,000.
On the other hand, the Beijing air pollution indicator as a thermometer shows that the Chinese manufacturing industry has collapsed in recent months, bringing the index back to 2021 levels, with production almost stopped due to the harshest lockdowns due to covid. Likewise, the “decline” in oil imports from the “Asian giant” is notable, which has sounded the alarm within OPEC and other crude oil producers.
The problems don’t stop
Beyond the 2024 slowdown, next year could be even worse for China in terms of growth. From JP Morgan, they bet on a GDP variation rate of 4% in 2025. Moreover, China could face a new term of Donald Trump, who will certainly tighten his trade policy to reduce the trade deficit with China and limit the transfer of sensitive knowledge.
“Among all the policies Trump is likely to launch against ChinhasThe clearest and perhaps most impactful is a 60% import duty on all Chinese products,” Nomura points out. Even if the impact will be felt in China in 2025, the blow will not be excessively drastic, since China already has its “decoupling” with the United States has begun.
“With the United States now playing a smaller role in the Chinese export market and many Chinese exporters having already found ways to partially circumvent these tariffs, the impact on total exports may not be as severe as many fear. That said, there could be some spillover effects on other parts of the economy, causing unemployment and reduced household incomes, lower consumption, lower manufacturing investment and perhaps less total foreign direct investment, we expect. a 0.4 percentage point drag on China’s real GDP growth in 2025 through all these channels,” they emphasize from Nomura.
“THE Falling real estate prices and weak labor market will continue to dampen consumer spending in the months ahead. And with the People’s Bank of China worried about a bond bubble, large-scale monetary easing seems unlikely. But higher fiscal spending and continued strength in exports mean the economy can regain some momentum for the rest of the year. However, the medium-term outlook remains challenging. Rising trade barriers threaten to eventually hamper exports. And construction activity still has a long way to go,” concludes Gabriel Ng, strategist at Capital Economics.
