Where is economy headed? Pluses and minuses

Huang Yixuan
Economists estimate China's gross domestic product at around 6 percent in 2020.
Huang Yixuan

With the end of 2019, market watchers are turning their attention to economic prospects in the new year. 

Huang Jun, chief economist for China at Forex.com, estimates that China’s gross domestic product should come in at about 6 percent. That would be on the lower end of the government’s growth target of 6 percent to 6.5 percent. 

Looking forward, the crystal-ball gazers are sizing up the pros and cons of economic growth. 

Standard Chartered is forecasting 6.1 percent growth for 2020, above the general market consensus. The bank said that "despite trade and housing headwinds, we see tailwinds from policies, car sales and the inventory cycle." 

Ding Shuang, chief economist for China and North Asia at the bank, said, “We think the government will set the 2020 growth target at around 6 percent, providing policy support for a slightly higher growth rate.” 

The government, which set a growth target of 6-6.5 percent for 2019, may be recognizing a downtrend in the economy, given an already high leverage ratio and the need to reserve policy breathing space in its long-term competition with the US, Ding added. 

He said he believes fiscal policy may shift from tax cuts to spending, and both central and local government bond issuance quotas are likely to be increased to finance deficits. 

Looking further ahead, Standard Chartered forecasts that China may shed its binding growth target for employment after 2020, attaching more importance to the quality of growth and job creation. 

As a result, expectations for growth may be reduced to 5.8 percent in 2021, and to average growth of 5.5 percent from 2021-25, the bank said. 

Xiong Yi, China economist at Deutsche Bank, said the economy still has exciting prospects in the new year, with a moderate recovery starting from the second quarter. 

Export growth is expected to return to positive levels, bolstered by a more stable global economy and the conclusion of the “first phase” of trade talks between the US and China. 

“We predict that China’s exports will bottom out in the coming months, then gradually pick up until the end of 2020,” Xiong said. 

Japanese financial holding company Nomura, meanwhile, sees housing construction, home appliances, automobiles and 5G as drivers of the Chinese economy in 2020. 

“Following the strong recovery in home construction in 2019, we expect growth in new home completions to jump from an estimated 1.5 percent in 2019 to around 10 percent in 2020,” said Lu Ting, chief China economist at Nomura. “This higher rate could boost demand for home decor materials, home appliances and furniture.” 

Beijing has made 5G a magnet for investment, he said, and demand for autos should stabilize after sliding for more than two years. 

Drags on the economy, according to Lu, could be local governments, developers, manufacturers and banks. 

Meanwhile, despite the agreement on a “phase one” trade deal, ongoing frictions between the US and China remain a risk to economy. 

Loggerheads over trade and technology, industrial policy, cyber-security and geopolitical issues are likely to persist for an extended period. Lu said that the US-China trade war is unpredictable in 2020, which might hit China’s exports and manufacturing investment growth. 

"Phase two" negotiations may be bumpier in a US election year, according to Standard Chartered. Outstanding issues, such as intellectual property rights, industrial policy and the way policies are enforced are complicated, the bank said. 

More importantly, any agreement with China on fundamental issues ahead of the US presidential election could create an easy target for President Donald Trump’s political rivals, the bank said. 

Standard Chartered bank estimates that higher US tariffs will reduce China’s 2020 growth by 0.3 percentage points if the “phase one” trade deal is signed, and by 0.6 percentage points in a “worse-case” scenario.

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