The economic slowdown in China and the implementation of its industrial policy will have large consequences for the rest of the world. Effects will vary from country to country, depending on the transmission channels. For emerging countries, the overall impact will not be necessarily negative, notably thanks to the foreign direct investment channel, which could well change the situation. We are discussing this with Christine Peltier.
Activity surveys were negative in October. Jibun Bank’s preliminary survey reported a decline in the manufacturing PMI to 49.0 (-0.7pp). The decline was more pronounced for activity in the services sector, with the corresponding PMI losing 3.8pp to 49.3, contracting for the first time since June. According to the Bank of Japan’s (BoJ) quarterly Tankan survey, the overall business climate improved slightly in Q3, but remained stable for large manufacturing companies. We expect growth to fall to +0.3% q/q in Q3 (-0.4pp compared to Q2 2024), due to the dissipation of the technical upturn that had buoyed it in the previous quarter.
In Q3 2024, Chinese economic growth accelerated to +0.9% quarter-on-quarter (q/q), after its poor performance in the previous quarter (+0.5% q/q). It stood at +4.6% year-on-year (y/y), which is slightly lower than in Q2, and reached +4.8% y/y over the first three quarters of 2024. In order to hit the official growth target of "around 5%" set for 2024, activity will have to rebound strongly during the final quarter of the year. This means that the fiscal stimulus measures announced by the authorities since the last week of September need to be rolled out quickly. These announcements have provided less details than expected on the stimulus measures and were less significant than expected by the markets
In China, economic activity data of the last few weeks has been bad enough to shock the authorities into action. While support for domestic demand had remained stubbornly cautious for several months, the last week of September saw a succession of announcements of new monetary easing and then fiscal stimulus measures. This change in policy direction reduces, but does not eliminate, the downside risks to short-term economic growth. If the fiscal expansion plan, the precise content of which has yet to be specified, is implemented quickly, the growth target of "around 5%" set by Beijing for 2024 could be achieved.
The Bank of Japan is continuing with its incremental and cautious monetary tightening, with a single policy rate hike in Q3, which is expected to precede further movement in December, while the July decision has contributed to major financial market volatility. At the same time, the economy is recovering from a turbulent start to the year and inflation is still above the 2% target. In addition, the country has a new Prime Minister and early general elections are now scheduled for October 27th.
Australian growth is facing an undeniable slowdown, which is linked to the prolonged constraints on households as a result of rising prices and interest rates, as well as slowing demand from its Asian trading partners. Stubborn inflation is currently an obstacle to easing interest rates. On the other hand, the migratory influx is boosting a labour market which remains buoyant.
Bank Indonesia unexpectedly cut its monetary policy rates on 18 September (-25 bps). This easing was largely due to the rupiah strengthening against the USD since August (+6.4%).
Economic indicators for August 2024 once again show that Chinese economic growth is lacking strength. The real GDP growth target of “around 5%” set by Beijing for 2024 can only be achieved with a stronger impetus generated by monetary easing and fiscal expansion.
Growth in emerging markets held up fairly well until the spring of 2024, partly thanks to the easing of monetary policies since mid-2023. The imminent one in the United States should make it possible to extend or even strengthen it. In the most likely scenario of a soft landing of the US economy, the main risk for emerging economies is a sharper-than-expected slowdown in the Chinese economy. The slump in the real estate sector is spreading through the fall in commodity prices. On the one hand, most emerging countries will gain in disinflation. But, on the other hand, commodity-exporting countries of which China is the main customer will suffer. Above all, the risk of contagion lies in the implications of the Chinese authorities' strategy of supporting growth through foreign trade
The Chinese export sector has weathered well the rise in trade tensions and tech rivalry with the US since 2018. The Chinese industry has shown a solid capacity to adapt to the increase in trade barriers and it has kept its leadership position in global trade.
After a rebound to +1.5% q/q in Q1 2024, Chinese economic growth slowed to +0.7% q/q. It stood at +5% year-on-year in the first half of the year. The economic growth target of “around 5%” set by Beijing for 2024 remains achievable.
Japan's economic growth should benefit from a technical upturn in Q2: we expect growth of 0.5% q/q after the contraction in Q1 (revised downwards to -0.7% q/q). The outlook remains negative – particularly for demand, despite the tax cuts introduced in June – while household consumption spending contracted by -1.8% y/y in May. Furthermore, while wage increases (excluding bonuses) reached their highest level since 1993 in May (+2.5% y/y), a sign of the growing transmission of negotiated wage increases (+5.1% y/y according to the Rengo trade union), real incomes are still not rising (-1.4% y/y).
In China, manufacturing activity remains dynamic, but rising tensions with most of its trading partners and an increase in protectionist measures are now weighing on export prospects. At the same time, domestic demand continues to be held back by the crisis in the property sector, and credit growth is slowing despite monetary easing measures. Therefore, the authorities are expected to continue to ease cautiously their economic policy in the coming months. The financial difficulties of local governments and, more generally, the deterioration in public finances have reduced the fiscal room for manoeuvre. The central government is being pressed to take a more direct role in support measures.
Indian economic growth reached 8.2% for the fiscal year 2023/2024. However, this performance did not enable Narendra Modi's ruling Bharatiya Janata Party (BJP) to retain a majority in parliament. Over the next five years, the BJP will have to deal with the smaller parties that are partners in the coalition it leads to run the country. Adopting new reforms to further liberalise the economy could prove difficult. In addition, the Prime Minister may have to change the structure of budget spending in order to increase once again the share of subsidies and other social transfers, which have been falling for the past five years
President Lai Ching-te took office on 20 May. He is expected to continue the domestic and foreign policy agenda of his predecessor, in a more tense climate. On the one hand, Beijing could increase its military manoeuvres around the island. On the other hand, Parliament is now dominated by opposition parties, which are expected to slow down or block many government projects. The new administration will at least be able to count on a favourable economic situation to start its mandate. Economic growth has been accelerating over the past year, driven by the rebound in the global electronics cycle
In China, manufacturing activity has remained dynamic, driven in particular by strong growth in exports of high value-added goods. However, the global market share gains made by Chinese companies, bolstered by public subsidies, have exacerbated tensions with most of its trading partners. The proliferation of protectionist measures is now negatively affecting export prospects. At the same time, China’s domestic demand is being undermined by the ongoing crisis in the property sector, and monetary easing measures are failing to stimulate credit activity. Therefore, the authorities are expected to continue to ease cautiously their economic policy in the coming months.
While quarterly growth and inflation are expected to rise in the second quarter, the Bank of Japan is proceeding cautiously following its decision in March to end negative interest rates. A new plan for the pace of bond purchases will therefore be presented in July, while we expect just one further rate hike this year, probably in September. In addition, the domestic currency has continued to deteriorate, prompting the authorities to intervene in the foreign exchange market and fuelling fears of imported inflation.
May’s activity data once again highlights the fairly different dynamics of the various components of Chinese economic growth. Overall performance is still somewhat lacklustre and points to a slowdown in activity in Q2 2024 compared with the previous quarter.
For the fiscal year 2023/2024, which ended at the end of March 2024, economic growth in India reached 8.2%, the highest rate among Asian countries. Over the past twenty years, growth reached 6.3% per year on average. Yet, despite this performance, India’s GDP per capita remains low. In addition, income inequalities have increased and unemployment rates are high (especially among young people), despite higher education levels. The low levels of income and employment can be explained by the employment structure, which remains concentrated in agriculture, a sector with low value added. Despite the major reforms adopted by the Modi government to stimulate development of the manufacturing industry, the sector did not create any jobs over the period 2012-2019
In line with our expectations, the Japanese economy experienced a 0.5% q/q contraction in GDP in Q1 2024. This contraction was likely linked to the disruptions caused by the earthquake on 1 January on the Noto peninsula and the temporary closure of car manufacturing plants amid a safety scandal. GDP components pointed to a broad weakness in the economy with, primarily, a fourth consecutive contraction in household consumption, which was the main driver of the fall. In addition, the release was accompanied by growth in Q4 2023 being revised down to +0.0% q/q (from +0.1% previously). However, activity is expected to rebound in Q2, with our forecasts pointing to a growth rate of +0.8% q/q.
China’s economic growth continues to be typified by divergence between sectors and sluggish domestic private demand. As shown in our chart below, the manufacturing sector gained in strength between February and April 2024, compared to the previous three months, whilst the service sector saw no improvement.
Since China's accession to the World Trade Organisation (WTO) in December 2001, the European Union's bilateral deficit with the country has widened from EUR 39 billion to EUR 292 billion in 2023 (Eurostat data). This is by far the largest deterioration recorded by the Old Continent with a trading partner, even though, as a whole, the EU's trade balance with the rest of the world returned to surplus in 2023.
In the first quarter of 2024, China’s economic growth was stronger than expected and was largely driven by the export-oriented manufacturing sector. Against a backdrop of sluggish domestic demand and strategic rivalries, particularly with the United States, Beijing is further developing its industrial policy to support economic growth and strengthen "national security". Priority is given to the high-tech and energy transition sectors. With considerable support from the government, these sectors are moving up the value chain, increasing their production capacity, lowering selling prices and gaining export market shares. The flood of green tech products is expected to lead to further trade confrontations in the coming months.
The reform policies initiated since Narendra Modi came to power in 2014 are expected to continue with his very likely re-election next June. His economic performance has been positive overall, with robust growth, a strengthening banking sector, a surging investment rate and infrastructural deficiencies being reduced. However, the country is still facing many substantial structural challenges. GDP per capita is still much lower than in other Asian countries (China, Vietnam and Indonesia), the manufacturing sector is barely growing and the country fails to create enough jobs for young people, who are still experiencing very high unemployment rates.
Subianto Prabowo will become the new President of Indonesia on 20 October. He will inherit a strong economy with robust and stable growth (5.1% on average over the last ten years, excluding the COVID-19 period), a low fiscal deficit, moderate public debt and sound external accounts. However, there are major challenges ahead for the new President. In the next decade, the country’s demographic dividend will begin to fade. He will need to adopt reforms more quickly in order to get significantly more young people and women into employment and attract more foreign direct investment. Without this, Indonesia will become an “old” country before it becomes a "high income" country.
