Exports to China slumped 13.9 per cent, with shipments of semiconductors – the country’s most important export – down 8.3 per cent.
South Korea’s two biggest markets are China and the US, so the abrupt decline in its exports that it revealed on Monday says something disturbing about the developing state of the world’s two largest economies.
The data out of China and South Korea fits within the scenario outlined by the International Monetary Fund this week.
The IMF said the global expansion is weakening at an accelerating rate and that, while its downward revisions of its growth expectations were modest, the risks to more significant downward corrections were rising.
In the middle of last year the IMF was forecasting global growth of 3.9 per cent for 2019. Last October it reduced that to 3.7 per cent and now it has cut it again, to 3.5 per cent.
That may still be too optimistic. China was already struggling before Trump administration ignited a trade war, trying to deleverage an over-leveraged economy and restructure the unproductive sectors within its economy.
China’s economic growth has slowed to its lowest rate in nearly three decades.Credit:AP
Europe’s powerhouse economy, Germany, is struggling to avoid a recession, Italy is always on the verge of a crisis and France’s attempts to reform its sclerotic economy have provoked a massive backlash.
Developing economies are being hit by the decelerating Chinese economy and weakening currencies and capital flows as US interest rates have risen and the US Federal Reserve has withdrawn liquidity from the US and global financial system by shrinking its balance sheet.
The IMF said that trade tensions and a worsening of financial conditions—it said the two had recently become entwined, presumably in a reference to the reduced central bank liquidity, rising US rates and the dramatic sell-off in equity markets in the closing months of last year – were escalating the risks to global growth.
Around the world businesses and consumers have become nervous about the outlook and more defensive. Consumer confidence in the US, now experiencing the longest shut down of its government in history, has slumped. The shambolic Brexit process is hurting the UK economy and has adverse implications for Europe.
All that’s happening before we know whether or not the US and China can negotiate a deal that averts a full-scale trade war with damaging consequences, not just for the protagonists, but for the global economy.
Even without a resumption of hostilities, the trade conflicts have hurt both China and the US. In the US the shutdown, the waning of the impact of the Trump tax cuts and spending, the Fed’s rate rises and the financial market volatility are contributing to slower growth. The IMF expects the US economy, if all goes well, to grow 2.5 per cent this year but only 1.8 per cent in 2020.
The IMF didn’t provide any specific outlook for the Australian economy but it is clearly dependent on how China’s performs and how the Chinese authorities respond to both the lower growth rate in their economy and the trade confrontation with the US.
The deadline for a deal is March 1. While there are reports of progress and Chinese concessions as it tried to avoid the imposition of tariffs on another $US200 billion ($280 billion) of its exports to the US, if the demands of the more ‘hawkish’ members of the Trump administration are to be met, it would have to radically remake its economic model and surrender its economic and geopolitical ambitions. That’s unlikely.
The US-China trade impasse has unnerved global markets.Credit:Bloomberg
So far the authorities have not resorted to the kind of massive stimulus programs they embarked on in response to the financial crisis (and which helped create the credit issues they are now grappling with) but they have injected some liquidity into their system by lowering bank reserve requirements, cut some taxes and implemented a relatively modest transport infrastructure investment program.
The iron ore price is a key indicator of China’s industrial health. At $US75.90 a tonne it has probably benefited to some degree from that program but, with China’s winter nearing its end the looming re-opening of steel mills closed in winter to improve air quality, seasonal influences are probably the stronger strand of the explanation.
With the 70th anniversary of the founding of the People’s Republic of China looming in October, it seems reasonable to assume the authorities will do whatever it takes to try to maintain a respectable growth rate and avoid social unrest, regardless of the external environment or internal financial challenges.
It was China’s massive stimulus program during the financial crisis that enabled our economy to get through that period largely unscathed. It is in our interests that they are successful.
Stephen is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.
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