Not just China: why the global economy needs Beijing’s stimulus measures to boost growth
- David Brown says concerns are growing around the world about slowing growth, and only Beijing – not Britain, Japan, the EU or even the US – are in a position to revive economic hope
For global economy watchers and forecasters, China’s growth prospects could be make-or-break for world markets in 2019. With some pessimists starting to wonder whether financial markets are already heading for a rerun of the 2008 crash , just how well China withstands the global downturn could be the key for confidence. The worry is that China’s descending growth rate over the past few years could easily nosedive into a heavy, hard landing unless sweeping changes are made to the government’s policy initiatives. Beijing must get moving soon to turn the tide.
Unless Beijing acknowledges the scale of the impending crisis, China’s economy could end up badly behind the curve. It is all very well talking up the economy with upbeat growth forecasts, but being long on hype and short on reality is taking a gamble. It is time to be much more frank about the risks to global growth and how much more Beijing needs to do to pull China’s economy up by the boot-straps and to help fast-track quicker recovery.
Until China’s planners come up with hard forecast numbers, markets can only guess at what officials are pencilling in for 2019. Recent hints suggest targeted growth for gross domestic product might be scaled back to between 6 and 6.5 per cent from a likely outturn of 6.5 per cent this year. Given the downward drift in recent years, China is clearly struggling to match the glory years of double-digit growth in the not-too-distant past.
Despite the prevailing headwinds, market forecasters seem relatively unfazed right now, with expectations for China’s growth rate next year ranging between 6 and 7 per cent, with an implied average of 6.3 per cent, according to the latest Reuters’ market survey. It suggests too much complacency is building, leaving global markets more susceptible to downside surprise risks. Equity and credit markets could be seriously exposed as growth expectations are downgraded.
The global economy faces a formidable uphill struggle in 2019. US growth prospects may well pull up short thanks to relentless Federal Reserve tightening, Japan’s economy is struggling, Europe looks more vulnerable and Britain could fall into a Brexit black hole. Emerging markets risk being dragged under as the crisis spreads. The world economy is stalling and in dire need of a jump-start. The trouble is that all available global policy stimulus is currently running close to empty.
Whichever way you slice and dice China’s economic data, there is a prevailing sense of slower momentum. China’s consumers, the main driving force in the economy, seem to have hit a cautious streak. Stock market uncertainty, weakness in China’s housing market and worries about job prospects have left a dent in consumer confidence. Car sales are looking lacklustre and retail sales growth is losing its edge. Annual retail sales growth slipped to 8.1 per cent in November, the slowest rate seen since May 2003.
Mainland industrial production data, usually a good bellwether for the economy, shows the factory sector taking a beating, too. In November, industrial output was only running 5.4 per cent higher than a year ago, well below the 9.5 per cent average notched up over the past 25 years. Trend output growth has slowed dramatically in the past few years and showing no sign of a turnaround as the fallout from China’s trade spat with America takes its toll. Business confidence is suffering.
This is not going to get any better without a much bigger helping hand from the government. One thing is clear; Beijing must shift focus from an export-led recovery to boosting the domestic economy. On the fiscal side, this means massive investment spending, increased government subsidies and bigger tax cuts to make any difference. This will blow a bigger hole in Beijing’s budget deficit, setting the scene for much bigger debt issuance, potentially upsetting foreign investors’ new-found novelty value in Chinese government bonds.
Unless the United States throws Beijing a lifeline on trade, China faces a stark choice between sink or swim in 2019. Rather than simply treading water, Beijing needs a credible long-term solution rather than a temporary quick fix. Inward and upwards should be Beijing’s motto for 2019.
David Brown is the chief executive of New View Economics