Global Outlook: China December 2017




Mainland China Outlook:

The economy continues to defy signs of an abrupt slowdown on the back of resilient household consumption. GDP expanded 6.8% annually in Q3, just a notch below H1’s 6.9% increase and comfortably in line to achieve this year’s 6.5% growth target. The slight deceleration reflected poor investment dynamics partially due to stricter environmental regulations. Recent data for October suggests the economy is losing some momentum in Q4, with the manufacturing PMI receding, trade data weakening and the housing market showing signs of fatigue. At the closing of the National Congress of the Communist Party on 24 October, President Xi Jinping’s thought was enshrined into the party’s guiding principles. This is the first time since Mao Zedong that a living party leader has been incorporated into the party’s constitution, reflecting the amount of power Xi has amassed since he took over as General Secretary in 2012. Meanwhile, U.S. President Donald Trump softened his tone in his recent visit to China, shifting the blame for trade imbalances from China to past U.S. administrations. China will continue with its managed deceleration as authorities seek to achieve a more sustainable growth trajectory, while implementing economic reforms. Fiscal policy will remain accommodative next year, while the government will likely tighten financial conditions. FocusEconomics panelists forecast that the economy will grow 6.4% in 2018, which is unchanged from last month’s forecast. In 2019, the economy is expected to grow 6.1%. In October, inflation rose to 1.9% from 1.6% in September. Inflationary pressures are expected to resurface slightly going forward due to higher commodity prices. Our panel forecasts that inflation will average 2.2% in 2018 and 2.3% in 2019.


Hong Kong Outlook:

The economy cooled in Q3, but nevertheless defied expectations of a sharper moderation as exports and household spending continued growing robustly. In Q3, the external sector benefited from the broad based global upturn as exports of both goods and services lurched ahead—the latter due to greater cargo flows and the recovery in inbound tourism. Domestically, private consumption surged once again on full employment and solid real income growth, corroborated by this year’s turnaround in retail sales through September. Fixed investment, on the other hand, contracted as machinery and equipment acquisitions slumped, although building and construction appeared unaffected by the recent cool-off in the property market. Furthermore, October’s weaker PMI reading—marred by stagnant output and declining orders from mainland China—suggests that a rebound in investment may not be forthcoming before year-end, in line with expectations of a broader slowdown in Q4. An economic downshift appears to be underway after an outsized performance in H1, although the strength of the global economy has so far moderated the deceleration. That said, waning demand from mainland China is expected to restrain growth next year. Despite full employment and soaring asset values, household spending is expected to moderate in the medium term and weigh on domestic demand. Our analysts expect GDP to grow 2.5% in 2018, which is up 0.1 percentage point from last month’s forecast, and then tick up to 2.6% in 2019. Inflation fell markedly to 1.4% in September (August: 1.9%) on a substantial public housing base effect. If the Fed continues raising interest rates in the short term, a sudden correction in asset values remains a distinct possibility. Our panelists expect inflation to average 2.3% in 2018 and 2.4% in 2019.


Taiwan Outlook:

The economy roared through the third quarter on the back of a stellar performance in the external sector. Strong global economic growth and a cyclical upswing in electronics exports supported shipments overseas throughout the quarter, with the external sector recording its largest contribution to growth in over five years. Conversely, the domestic sector dragged on growth as gross capital formation growth plunged and households failed to respond to stronger real wages and a buoyant equity market. Looking to Q4, leading data points to another solid outturn. Consumer sentiment hit a fresh two-year high in October because of a healthy labor market, while business confidence logged its best result since late 2015, reflecting positive underlying trends in the external and manufacturing sectors. • The government’s loosened fiscal stance, which includes the implementation of the country’s Forward-Looking Infrastructure Plan and higher public-sector wages, is expected to shore up fixed investment and government consumption next year. Conversely, exports are expected to turn slightly less supportive of GDP growth due to a strong base effect and maturing economic cycles across several advanced economies. FocusEconomics panelists forecast growth of 2.3% next year, which is up 0.1 percentage points from last month’s estimate. GDP growth is seen at 2.2% in 2019. In annual terms, consumer prices were down 0.3% in October, which contrasted the 0.5% increase recorded in the previous month. Price pressures have weakened severely in recent months due to a base effect for fresh fruit and vegetable prices, but a pick-up in core inflation in October suggests the dip in the headline reading could prove temporary. Our panel expects inflation to average 1.2% in 2018 and 1.3% in 2019.

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