Things aren’t looking great for China’s economy and it may only be getting worse

WANG ZHAO/AFP/Getty Images

Manufacturing and exports are slowing in China, but retail spending has been much more resilient.

If you thought China’s 6% growth rate for this year’s third quarter — which indicates that the country is growing at its slowest pace in nearly 30 years — was bad, brace for worse.

The International Monetary Fund predicts that the Chinese gross domestic product will grow at a rate of 5.8% in 2020, according to its World Economic Outlook published over the weekend. Six months ago, the IMF had forecast a growth rate of 6.1%.

The downward revision was triggered by “the effects of escalating tariffs and weakening external demand,” which have “exacerbated the slowdown associated with needed regulatory strengthening to rein in the accumulation of debt,” the report states.

Among economists, there appears to be a disagreement over which effect is making a greater contribution to the country’s dismal growth prospects.

Jennifer Lee, senior economist and director of economic research at BMO Capital Markets, believes that the trade war is to blame.

“China is still reliant on trade, even though exports as the share of the economy has declined,” she said. “The tariffs that the U.S. has imposed on China’s goods that cross over the Pacific are hurting those industries.”

On top of which, retaliatory tariffs China has placed on American goods such as pork and soybeans have curbed Chinese demand, Lee said.

Unlike Lee, Louis Kuijs, chief Asia economist at Oxford Economics, said the trade war is just one side of the coin.

“China’s economy has been impacted by serious headwinds, especially stemming from slower global trade, the U.S.-China trade war and the effect that has on the appetite to invest.”

Kuijs said that the service and consumption sector has “been the most robust in relative terms, in the sense that growth there has slowed down less than elsewhere in the economy.” The latest figures indicate that the retail sector in China for the first three quarters of the year increased by 8.2% compared to last year.

“But, in part because household consumption is still a modest share of GDP” around 38%, he said, “this relative resilience has not been enough to fully offset the headwinds, which is why overall growth has slowed.”

Compared to the rest of the world, China’s 6% growth rate doesn’t rattle Carl Weinberg, chief international economist at High Frequency Economics.

“It seems to us that in a world where average GDP growth is barely over 3%, China’s growth rate of 6% is not too shabby,” Weinberg said in a note.

He added that there are pockets of hope in China’s third-quarter report.

Monthly figures like the industrial production rate in September, which was 1.6% higher than in August, and the electrical production rate, which rose to 4.7%, he considers to be “signs of a nascent recovery.”

Like Kuijs, he agreed that “consumer spending remains a weak link in China’s economic picture.”

As for the trade war, there is some progress being made to negotiate a deal with China.

President Donald Trump said earlier this month that the U.S. and China had reached a “very substantial phase one deal.” This portion of the deal, Trump said, will address intellectual property concerns and $40 billion to $50 billion worth of agricultural purchases will be made by China. The U.S. also held off on slapping additional tariffs on Chinese imports.

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