【Monthly Update】Navigating uncharted waters – Monthly Economic Update for August
- Global economy: Recession signals are flashing. 2Q2019 GDP data of many economies confirmed the slowest growth rate in a decade amid mounting fears of recession. Yield curves inverted in US, UK, Canada, sending the strongest recession warnings since 2007. Jul saw a mild uptick in the rate of global economic expansion, driven by the improved growth at service providers. We anticipate global trade to further deteriorate in 3Q19 and the decline in electronic components, automotive products and international air freights is likely to be the most pronounced.
- Central Banks: More central banks join policy easing tide to spur growth. But monetary policy actions may fall short in defusing rising global risks. Since FOMC’s last meeting on 31 Jul, US-China trade disputes has escalated and US Treasury yield curve been inverted. We now expect the Fed to cut rates in Sep (25bp as the most likely). If the trade situation deteriorates, the possibility of further interest rate cuts within this year (Oct or Dec) cannot be ruled out.
- Chinese Economy: Activity growth saw a broad-based slowdown in Jul. Industrial production declined in Jul went beyond seasonality, due to weaker global economic growth, escalating trade frictions, destocking in industrial enterprises and falling PPI inflation. We expect more reliance on consumer spending to help stabilize growth and a positive outlook on consumption growth in 2H19. Meanwhile, headwinds persist, including the slowdown in personal income growth, rise in unemployment rate and weak property sales. Policy benefits including tax cuts and a shift of financial institutions’ lending to manufacturing sector, will keep manufacturing investment resilient amid weakening external demand.
- Inflation: CPI soared on food prices and PPI returned to deflation. Given the low base of 4Q18, we expect CPI inflation to drop slightly before it rises again. Overall, the average CPI inflation in 2H19 is likely to be higher than that of 1H19. PPI dipped into negative territory in Jul, dragged by raw materials and computer sectors. PPI inflation may continue to modestly decline and staying in negative territory from Aug to Oct, before it turns positive in Dec.
- Fiscal Policy: Slowing revenue growth constrained expenditure. Tax revenues decelerated in Jul despite non-tax revenues surged rapidly. The tightening property curb means more budget constraints on local governments. If tax revenues continue declining, we expect the government to collect more dividends from some state-owned financial institutions and enterprises, and to boost income from paid use of state-owned resources and assets. As fiscal revenue growth hit a decade low, fiscal expenditure began to run out of steam since 2Q19. The pressure from the revenue side is likely to linger, providing inadequate support for infrastructure investment. If the downward pressure on economy increases in the near future, it is possible for Chinese government to take more aggressive fiscal actions such as hiking the budget deficit rate and increasing local debt issuance, in order to boost stimulus and achieve this year’s economic growth target.
