LONDON: Ten yearsafter China helped stave off the threat of a global depression with a hugestimulus plan, investors are looking once again towards Beijing as the worldeconomy heads for a slowdown, or worse, in 2019. Booming China has accountedfor about a third of the growth in the global economy in recent years. Sorecent signs that it is losing momentum is unsettling when the US boom,turbo-charged by President Donald Trump's tax cuts of 2017, seems to havepeaked and Europe's heavyweights are stalling.
China's slowdownis already being felt around the world, from Apple's profit warning due toweaker sales of its iPhones to carmaker Jaguar Land Rover laying off workers,after a 22 percent fall in sales in the country in 2018. Policy sources toldReuters in Beijing on Friday that the government is planning a lower economicgrowth target of 6-6.5 percent for 2019 after an expected 6.6 percent in 2018,which would be the slowest expansion since 1990.
In the first fewdays of 2019, China raised infrastructure spending with a $34 billion railwayinvestment and its central bank loosened the screws on banks to encourage themlend more, its fifth such move in a year. "China, that's what worries memost," Joachim Fels, managing director and global economic advisor at bondgiant Pacific Investment Management Company, said as he surveyed the outlookfor the world economy in 2019.
As well ascutting China's appetite for imports, a deeper slowdown could weaken its yuancurrency and fan the flames of the trade war between Beijing and Washington.However, Fels said his recession models for 2019 were flashing only orangewarnings-not red-in part because the US Federal Reserve was likely to pause itsrun of interest rate hikes after one or two more increases. China is expectedto do more to act to help its economy too, although officials in Beijing saythey do not plan a stimulus of the magnitude of the nearly $600 billion packageunleashed in 2008, shortly after the collapse of Lehman Brothers.
"I find ithard to look at it historically and bet against the Chinese authoritiesmanaging to stabilize their economy," Jim McCormick, global head of deskstrategy for RBS division NatWest Markets, said. "When China wants tostabilize its economy, they tend to be successful." In November, theOrganization for Economic Co-operation and Development trimmed its forecastsfor Chinese growth to 6.3 percent in 2019 followed by 6.0 percent in 2020.
Since then, theimpact of US-China trade tensions have become more apparent, OECD senioreconomist Margit Molnar said, suggesting the forecasts could be lowered again.Higher borrowing by local governments in China suggested a pick-up ininfrastructure spending was coming, she said, potentially helping to offsetsigns of fragile confidence among Chinese consumers.
"The majorissue is to guarantee a gradual slowing," Molnar said.
Investors breatheeasier
For the timebeing, the concerns of investors in late 2018 about the global economy haveeased, leading to a tentative recovery in battered stock markets. A round oftalks between US and Chinese trade officials in Beijing did not end inacrimony. And in Europe, a slowdown is probably in part due to one-off factorssuch as new pollution rules for carmakers and the impact of the 'gilets jaunes'protests in France which has been felt in the supply chains that stretch acrossthe border into Germany.
Steven Bell,chief economist with BMO Global Asset Management, said surveys of purchasingmanagers in the private sector around the world suggested a broad pick-up inindustrial production was not far off. And for many consumers in richeconomies, low inflation and gradually rising wages will help their spendingpower.
But even if the worldeconomy avoids a painful slowdown this year, it faces daunting fundamentalchallenges. Many countries seem stuck in a rut of slow productivity growthwhich puts a brake on earnings and has propelled the rise of populist politics,from Trump to the protests in France.
In Britain, theradical left-wing leadership of Britain's opposition Labor Party is worryinginvestors after Prime Minister Theresa May split her Conservative Party withher plan to ease Britain out of the European Union at the end of March. GabrielSterne, head of global macro research at Oxford Economics, said the pressure onpoliticians to heed the frustration of voters after years of austerity couldhelp end an overly tight squeeze on public spending by some governments.
"By contrast,a worst-case scenario is one in which frustrated politicians launch hastyattacks or takeovers of key institutions, compromising central bankindependence and launching unsustainable fiscal expansions," he said."Afflicted advanced-economy assets could even behave as if in an emergingmarket crisis." - Reuters