The world’s second largest economy is feeling the effects of a darkening trade outlook and government attempts to rein in risky lending after a rapid rise in debt levels.
“The drivers of China’s slowdown have yet to have their full impact on the economy, and the combination of both is unprecedented,” analysts at Moody’s wrote in a research note this month. “This creates a high degree of uncertainty and risk.”
What happens in China matters for businesses and markets across the globe. It’s the world’s largest exporter of goods, sucking in materials from other countries in order to ship out iPhones, laptops, bulldozers and tons of other products.
“China has become the world’s largest growth engine,” said Rajiv Biswas, chief Asia-Pacific economist at research firm IHS Markit.
What remains uncertain is the severity of the slowdown and how far the Chinese government will go in trying to soften its impact.
The big wild card is how the trade war between the United States and China, which began this year, will play out in 2019.
Meanwhile, the economic hit from the trade war is expected to become more pronounced in China in the coming months, hurting exports and companies’ profits.
“Export growth will come under pressure even if a further escalation in tariffs is avoided,” Julian Evans-Pritchard, senior China economist at research firm Capital Economics, wrote in a note to clients this month.
Opinion is divided on whether the two governments will reach a lasting agreement in the next two months. Their expanding conflict is about far more than just trade. It spans China’s stance on technology, intellectual property, investment, industrial policy and access to its markets.
“The path to an eventual truce between the two economic superpowers is likely to be bumpy and prolonged,” analysts at investment firm Vanguard said in a report this month.
Along the way, they could do plenty more economic damage to one another.
“The trade war has the potential to hit growth significantly,” said Gerard Burg, China economist at National Australia Bank. “But it all depends on how far both sides are willing to push.”
The renewed negotiations show China’s need “to achieve some sort of deal with the United States to buy badly-needed breathing space in a toughening economic climate,” Diana Choyleva, chief economist at research firm Enodo Economics, wrote in a note to clients this month.
A crucial question for China is how its consumers respond to the uncertainty.
“Household consumption is what has driven the structural growth story in China,” said Edmund Goh, a portfolio manager at Aberdeen Standard Investments in Shanghai. “It has defied a lot of the slowdown”
But cracks are starting to show.
Debt levels among Chinese consumers have been rising quickly, which could add to their reluctance to spend, Goh said.
China is likely to meet the difficulties facing the economy with its trademark approach: juicing activity through government stimulus.
“The government has shelved reform,” she said, and will instead “focus on pro-growth measures.”
2. Jobs report: The US Labor Department will release its December jobs report on Friday. Economists expect the report to show that the American economy added 178,000 jobs, according to a survey conducted by Refinitiv. The unemployment rate is forecast to remain at 3.7% — a near-50-year low. And paychecks are expected to grow by 3%.
The American labor market is strong. Employers list more job openings than there are people to fill them. But economists predict economic growth will slow in 2019 as the effects of tax cuts and government spending wear off.
3. One trading day left in December: The stock market is on track for the worst December since 1931. Stocks have one more day left to make up some lost ground.
The Department of Labor is funded through September 2019, so the monthly jobs report scheduled for Friday will remain on time. But both the Bureau of Economic Analysis and the Census Bureau, which belong to the Department of Commerce, have ceased providing updates and can only resume after Congress and the White House agree on a deal. The same is true of the Department of Agriculture, which produces data on crop production, prices and sales.
No major reports are due next week, but international trade figures for November are scheduled to be released on January 8. The Census Bureau had been planning to report on public pensions for the third quarter and residential home sales, as well as more international trade data.
5. Coming this week:
Monday — Last trading day of 2018
Tuesday — Markets closed for New Years Day
Wednesday — Chicago Purchasing Managers’ Index
Thursday — ISM manufacturing index
Friday — Jobs report for December