Trade war hits home

The trade war is hitting home by way of weak monthly trade figures. Exports contracted for the first time in two years, by 4.4% y/y in December, after rising by 5.7% y/y in November – missing market expectations of 3% growth. Overall, exports expanded by 9.9% in 2018, from 7.9% in 2017 – but the more recent data points matter more.

We reiterate that the front-loading of orders in recent months, as buyers attempt to pre-empt tariff increases, is coming home to roost. Trade, still relatively robust in 2018, will likely be weak in 2019.

Asian economic data points have shown for some time export-orientated production chains spluttering. For instance, in South Korea, growth in outbound shipments first slowed from 26% y/y in October to 5.7% y/y in November, then contracted by 1.2% y/y in December. Similarly, in Singapore, the PMI for the electronics sector slipped from 52.0 in October, to 49.9 in November and 49.8 in December, the lowest since July 2016.

Tellingly, the NBS PMI has fallen every month since August, most recently sliding from 50.0 in November to 49.4 in December – the first sub-50 points since July 2016. In fact, the new export sub-index was below 50 throughout H2:18.

Chinese imports in December contracted too, by 7.6% y/y –missing market expectations of 5%, recording the deepest contraction since February 2016.

Still, the cold front from abroad is just one challenge facing the Chinese economy. In fact, the iciest winds are domestic. Economic support measures are set to intensify in 2019. Chinese leaders will do more to support the economy: strengthening counter-cyclical adjustments, and implementing active fiscal policy, supported by a stable monetary policy. These measures are likely to place a floor under growth but won’t incur a recovery in the cyclical growth trajectory. For this reason, the government is starting to manage expectations which still seem too optimistic of Beijing’s capacity for generating a growth rebound.

Indeed, Beijing is reportedly planning on adjust the GDP growth target, introducing a range of 6.0-6.5%, down from last year’s 6.5%. Such a lower growth target would signal, domestically and internationally, that lower growth is part of the plan. 

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