Weaker China adds to risks of a synchronised global slowdown

World GDP would fall further should the US follow through on all its trade threats, including global duties on cars


BEIJING • China’s manufacturing sector worsened in October as the trade war hit home, adding to risks the global economy may be edging toward a synchronised slowdown.

China’s official factory gauge missed estimates with a reading of 50.2 and its exports sub-index slumped to the lowest reading since early 2016. In other data released yesterday, industrial output for September in South Korea and Japan came in below estimates, as did third-quarter (3Q) output in Taiwan.

With euro-area economic data disappointing and emerging markets (EMs) rattled by tumbling currencies and an exodus of capital, the world is increasingly looking to a turbocharged US economy to drive global expansion alone. Yet, the US boom is also expected to moderate next year as the effect of tax cuts wane, and trade tariffs and a strong dollar drag on growth.

“Outside the US, the list of indicators showing synchronous slowing growth is getting longer,” said Rob Subbaraman, head of EM economics at Nomura Holdings Inc in Singapore.

“Ultimately, weaker growth outside the US and financial market turmoil could spill back enough for the US Federal Reserve (Fed) to pause.”

Most sub-indexes in China’s official manufacturing Purchasing Managers’ Index (PMI) declined from September, indicating that the slowdown was widespread. The non-manufacturing PMI, which reflects activity in the construction and services sectors, also worsened to 53.9 from September’s 54.9 reading.

China’s government is balancing competing forces, attempting to support growth while also striving to slow the build-up of debt. Domestic economic growth is decelerating, the stock market is down, and while exports are still strong for now, they are expected to slow as higher US tariffs kick in.

A raft of measures were introduced this month to stabilise sentiment, adding to steps to boost liquidity in the financial system, tax deductions for households and targeted measures aimed at helping exporters.

Those measures have yet to have much impact, and the export orders gauge signals the economy will see more downward pressure in the months to come.

Trade Cliff
“China is heading for a New Year’s trade cliff, as exporters rush US shipments to get ahead of the tariffs,” said David Loevinger, a former China specialist at the US Treasury and now an analyst at fund manager TCW Group Inc in Los Angeles. “The problem is as the US slows, there’s no one to pass the baton to.”

South Korea’s industrial output tumbled a larger than expected 8.4% in September from a year earlier, the most in nine years. While some of that was due to the timing of holidays, the sputtering output adds to concerns about the economy losing steam.

Japan’s factory output also declined last month after a series of natural disasters, but the weakness clouds forecasts for 3Q economic growth. Production is projected to rebound in October before slipping again in November.

Taiwan’s economy, which is closely linked to China’s global supply chain, grew 2.28% in the 3Q, below forecasts and at the slowest pace in more than a year.

The run of Asia data came a day after news that the euro-area unexpectedly grew at its weakest in more than four years in the 3Q, with Germany and Italy grinding to a halt.

For now though, the US is in good shape with data on Tuesday showing consumer confidence hitting an 18-year high after its economy expanded at a 3.5% pace in the 3Q, marking the best back-to-back quarters of expansion since 2014.

The International Monetary Fund earlier this month cut its global growth forecast for the first time in two years, blaming escalating trade tensions and stresses in emerging markets. World GDP would fall further should US President Donald Trump follow through on all his trade threats, including global duties on cars, it said.

Early Reading
A set of early indicators on China’s economy compiled by Bloomberg Economics prior to the official PMI report suggested that sentiment among executives and investors continued to deteriorate in October.

On Tuesday, the currency slid to its lowest level against the US dollar in more than a decade following a report that Trump plans to expand tariffs to cover the full range of imports from China if he is unable to extract concessions from President Xi Jinping during a Group of 20 summit of world leaders in Argentina at the end of November. The yuan traded onshore at 6.9715 per dollar at 3:58pm in Shanghai yesterday.

The benchmark stock index rose for a second day, but ended the month down almost 8%.

Top officials including Xi have sought to bolster investor confidence, commenting on the fundamental strength of the economy and attempting to talk up the stock market.

“It’s important to keep China’s deceleration in perspective,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings plc in Hong Kong. “While growth is slowing, the latest numbers suggest that the manufacturing sector continues to expand. Therefore, policy support will likely remain incremental and targeted, not the big, sudden jolt that investors may expect.”