Economy in Brief: November 2024

In this week’s letter, we focus on China. The Chinese economy has shown early signs of a pickup in recent weeks, following a series of easing measures. However, these signs do not yet suggest a full-scale economic rebound, and observers remain uncertain about whether the economy will meet its 5% growth target for the year. We also explore China’s latest debt swap program for local governments, which many see as a positive step. Nonetheless, some are underwhelmed by the scale of the RMB 10 trln program, which is small compared to the estimated size of local governments’ "hidden debt". In addition, we address broader structural issues likely to continue as points of contention between China and other major economies, and most notably the US. Issues include China’s persistent current account surplus and concerns about its overcapacity. We examine the potential impacts of this overcapacity, from its detrimental effect on domestic industries in receiving economies to the deflationary pressures from Chinese exports. Additionally, we touch on the financial flows resulting from China’s export revenues. Finally, we end on a more positive note, highlighting China’s progress in its green energy transition, with some forecasters predicting that China will reach peak carbon emissions within the next year or two.

Recent developments The Chinese economy has picked up pace in recent months, following a series of easing measures introduced by authorities. These measures include interest rate cuts, relaxed property restrictions, and, more recently, a debt swap program for local governments. Of particular note is the official manufacturing PMI, which has returned to expansionary territory (Chart 1) for the first time in six months. More broadly, the economic surprises from China have shifted back to more neutral levels, following a period of disappointing results. However, while there are encouraging signs of a turnaround, these developments do not yet point to a full-scale economic rebound.

Industrial production in the United Kingdom fell by 1% in September after rising by 1.3% in August and falling by 1.3% in July, continuing a choppy pattern. In September output declined for capital goods, for intermediate goods, and for consumer nondurable goods with consumer durable goods output unchanged on the month. This bevy of declines followed monthly output increases across all sectors in August which followed output declines in all sectors in July. The monthly output trends have had all this stability of a car suspension on a cobblestone road.

Beyond the monthly gyrations sequential output trends show output getting progressively weaker. Manufacturing output falls by 0.7% over 12-months; it declines at a 2.4% annual rate over six-months and then accelerates that decline to a 3.9% annual rate drop over three-months. However, output does not get sequentially weaker across all of the sectors; it only weakens sequentially for intermediate goods output. However, of the 12-sequential sector calculations (across 4 sectors and three periods) all of the observations are negative except three. The bottom line is that the overall trend shows output declines are becoming steeper, and the sector level observations show that output is broadly declining across sectors.

The September figure ends, data for the third quarter; in that quarter (to date) output managed to increase by 0.8% at an annual rate with increases in all of the sectors except capital goods where output fell in the third quarter at a 1.7% annual rate.

Looking at some key industry details, we see quarter-to-date declines or flat performance at all industries in the table except for food, drink, & tobacco where there's a 1.8% annual rate increase in the third quarter.

The UK remains in a troubled spot and although the Bank of England has started to reduce interest rates, it has done it in an environment where inflation is not entirely behaving and perhaps this is because of the observation that economic growth is so weak and the belief that with growth this week inflation excesses will not be able to persist. Weak manufacturing is a global phenomenon. The UK does not set itself apart from the countries of the G7 by posting weak industrial results. It is unclear when there will be a turn-around in global manufacturing. The US economy that often leads business cycles is showing some signs of doing better, but its manufacturing data have not turned around partly because its economy has been hit by a significant strike and by a series of hurricanes that have interrupted the good sector of the economy. The outlook remains unclear and marred by ongoing geopolitical tensions with governments staffed by new participants all around.