The Economist - USA (2019-07-20)

The EconomistJuly 20th 2019 Finance & economics 61

C

hina’s economy is slowing, again.

After a good start to the year annual

growth slipped to 6.2% in the second quar-

ter, the weakest in nearly three decades.

That is hardly cause for panic: for an econ-

omy now worth nearly $14trn, such a

growth rate is impressive. As the trade war

with America hurts exporters, it also un-

derlines the extent to which China’s econ-

omy is now fuelled by domestic demand.

The question for the coming months is

whether that domestic strength will re-

main sufficient to offset the trade turmoil.

The export picture has clearly wors-

ened. Last year, even as America’s presi-

dent, Donald Trump, first levied tariffs on

China, the country still managed to in-

crease its exports by 10%. But this year Chi-

nese exports have all but stopped growing.

In May Mr Trump ratcheted up tariffs on

Chinese goods, and he has threatened to hit

China with yet more duties if trade negotia-

tors fail to resolve an impasse. China, for its

part, appears to be in no rush to reach a

deal: Zhong Shan, the hard-nosed com-

merce minister, recently joined the Chi-

nese negotiating team. In published com-

ments this week he blamed America for the

trade war, calling it “a classic example of

unilateralism and protectionism”.

China’s willingness to take a more un-

yielding stance partly reflects confidence

in its own economy. Activity accelerated

towards the end of the second quarter. In-

vestment in factories, roads and other

fixed assets increased by 6.3% in June com-

pared with a year earlier, up from 4.3%

year-on-year in May. Retail sales were also

robust, rising 9.8% in June compared with

a year earlier, up from 8.6% in May.

Yet there are doubts about how long this

resilience will last. Some of the apparent

strength is transient. Car sales, which had

been in the doldrums, surged in June to

double-digit growth, pushing up retail

sales more broadly. But that was largely be-

cause dealers had slashed prices to run

down inventories before tough new emis-

sion standards were imposed in July. The

property sector, a bellwether for the econ-

omy, also seems set to soften after sales

were down in the second quarter. Uncer-

tainty from the trade war may take a toll,

too. Foreign companies have started to

shift more operations away from China.

The government has started to spend

more on infrastructure, a tried-and-tested

method in China for revving up growth. In

recentmonthsit hasmadeit easierformu-

nicipalofficialstoraisefundsforbuilding

railwaysandhighways.Withthecentral

bankinjectingcashintothefinancialsys-

tem,nominalcreditgrowthhasalsoedged

upsincetheendof 2018 (seechart).

Buttherearelimitstohowfarthegov-

ernmentwillgo.China’spresident,XiJinp-

ing,hasdeclaredthatcontainingfinancial

risksisa matterofnationalsecurity.The

likelihoodofanothergiantstimulus,rou-

tineinthepastwhenevergrowthslowed,is

lowerthistime.Andthegovernmenthas

lessmoneytoworkwith,havingalready

rackedupsomuchdebtoverthepastde-

cade.It alsowantstoconserveitsfiscalfire-

powerincasethetradewarturnsuglier.In

themeantime,getusedtoheadlinesabout

Chinesegrowthatmulti-decadelows.They

arelikelytoappearagaininthreemonths

and,again,threemonthsafterthat. 7

SHANGHAI

The trade war with America hurts, but

the government is wary of stimulus

China’s slowing economy

Get used to it

Shiftingdowna gear

Source:CEIC

China,%increaseona yearearlier

2010 11 12 13 14 15 16 17 18 19

0

5

10

15

20

25

30

Nominaltotalcredit

RealGDP

T

he european central bank’s fire-

power is sadly depleted. The interest

rate on the reserves that banks hold with it

is sub-zero; its quantitative-easing (qe)

scheme has hoovered up assets worth

€2.6trn ($2.9trn)—equivalent to over a fifth

of the euro area’s gdp. Even so, in June Ma-

rio Draghi, the bank’s boss, promised fur-

ther stimulus if the economy does not buck

up. Statistics published since then suggest

little recovery. Cue much speculation

about another attempt to revive growth.

Many expect an announcement at the

bank’s meeting in September, along with

updated economic forecasts. But its next

gathering on July 25th could still surprise,

or at least lay the groundwork for stimulus.

With individual instruments nearing lim-

its, it is expected to deploy a combination.

Of late its weapon of choice has been

guidance on the path of interest rates. It has

promised to keep rates steady for longer, at

least until mid-2020. But markets expect

rates not merely to stay on hold, but to

fall—by a tenth of a percentage point, from

-0.4%, in coming months.

Banks complain that negative interest

rates shrink their margins: they have to pay

the central bank to hold their deposits, but

fear that if they pass negative rates on, their

depositors will withdraw their cash. Profits

and lending both fall, preventing the rate

from transmitting to the real economy. For

now, the ecb reckons it has not reached the

“effective lower bound”—the point at

which the expansionary effects of negative

interest rates stop outweighing any costs.

But unwanted side-effects may appear as

rates go lower.

Some economists therefore expect at-

tempts to mitigate the negative impact of

rate cuts by excusing banks from negative

rates on some excess reserves. Even then

rates may be not far off the lower bound.

Analysts at bnpParibas, a bank, think they

can fall by at most 0.4 percentage points

before that moment comes.

That limited space is why some econo-

mists also expect the bank to restart qelat-

er in the year. Daniele Antonucci of Morgan

Stanley, a Wall Street firm, expects the bank

to announce monthly purchases of govern-

ment and corporate debt of €45bn. But the

bank’s self-imposed limit on the share of a

country’s sovereign debt it can own, of 33%,

means this pace probably cannot be sus-

tained beyond a year.

This ceiling would need to be lifted if

any expansion of qeis to seem credible to

investors, reckons Spyros Andreopoulos of

bnpParibas. Though qe’s legality is ques-

tioned in Germany, in December the Euro-

pean Court of Justice ruled that the ecb was

acting legally, appearing to give it room to

raise its limit up to 50%. (The case returns

to German courts at the end of the month,

but judges are expected to bow to the ecj.)

In any case the bank would need to rethink

another self-imposed rule, says Mr Andre-

opoulos: that it avoid holding shares of in-

dividual securities large enough that it can

sway the outcome of investor votes on any

future debt restructuring.

Even with all this, the ecb’s ability to

cope alone with a serious downturn would

be limited. Even as Mr Draghi assured mar-

kets he had the firepower, he warned that

without fiscal support monetary easing

risked being slow to boost the economy,

with possible unwanted side-effects. Nega-

tive borrowing costs across many member

states make the case for dusting off fiscal

tools even more obvious. But Europe’s gov-

ernments guard their ammunition more

jealously than central bankers do. 7

To revive Europe’s ailing economies,

the bank must break its own rules

The European Central Bank

Space exploration