The 2020 outlook for China’s economy remains gloomy, but there is one bright spot
- The Chinese economy faces a tough road ahead, since breakthroughs in trade talks are unlikely in a US election year. A silver lining is that the rebalancing of the economy towards consumption has helped to support the labour market
This forecast is made with the following three key considerations: the economy’s natural growth, the trade war prospects and the degree of policy easing by Beijing.
In addition, our economic cycle indicator shows a persistent pattern of cycles spanning about 3½ years. If this pattern holds, the current cycle that started in mid-2016 could approach an end in late 2019, giving way to a new cycle in 2020.
The road ahead, therefore, is long and treacherous. US President Donald Trump would probably want to keep existing tariffs in place to force concessions over thorny issues from China.
Moreover, given that major breakthroughs in trade negotiations are unlikely in a US election year, an extended truce that preserves the status quo in levies is the most likely outcome. That said, we estimate that the lingering impact of the 2019 tariffs will lower GDP growth by 0.2 to 0.3 percentage point in 2020.
The escalation of the trade war with Washington has prompted Beijing to step up policy easing. However, the easing has so far been more restrained than in past cycles, for two reasons.
But the actual policy easing has been timid, due to Beijing’s desire to avoid worsening the structural and cyclical issues, which could destabilise the financial system and hamper the trade negotiations.
The other reason for Beijing’s policy restraint may be the resilience of the labour market. While official labour market data has somewhat moderated, it is far from alarming. This is partly because more jobs have been created in the consumption and services sectors as a result of China’s economic rebalancing than in trade and manufacturing.
Overall, we think Beijing can afford to maintain a prudent policy so long as the labour market stays resilient. We estimate that monetary and fiscal boosts will add 0.3 percentage point to growth in 2020. However, it won’t be enough to fully offset macro headwinds and economic growth might still slow to 5.8 per cent.
Aidan Yao is senior emerging Asia economist at AXA Investment Managers