China represents one of the biggest geopolitical threats to the current US economic expansion. The world’s two largest economies are so interwoven that a slowdown in one will inevitably impact the other. This is the first post exploring US international policy implications on housing, access the second post for insight on Chinese shopper reporting.
With China showing some signs of faltering, our Director of Economic Research, Ali Wolf, examined the relationship between the two superpowers and analyzes the implications for the marketplace. China’s gross domestic product (GDP) grew 6.6% year-over-year in 2018, the slowest annual growth rate since 1990. It may sound counterintuitive to say a 6.6% growth rate is alarming when Americans are happy with 3.0% and ecstatic at 4.0%, but the latest figure out of China shows what pundits have been expecting for months: trends in the global economy are shifting.
China’s 2018 GDP Growth
Cross-Border Trade Front And Center
It appears last year’s tariffs played a part in slowing China’s economy. China, America’s largest trading partner, was hit with a 10% tax on $200 billion in exports to the US in early-September 2018 after $50 billion at 25% earlier in the year*. The two nations need to strike an agreement by March 1st or else the tariff jumps to 25%.
One must remember that tariffs are simply taxes on imported goods paid by an importer. The importer is often a domestic producer, American companies in this case, who can do one of four things:
Absorb the cost at the expense of margin
Pass on the cost to their consumers and hope there is price inelasticity (meaning higher prices do not adversely affect demand)
Absorb some of the cost and raise prices marginally
Look for a domestic alternative so they do not have to import and pay the tax. This is often difficult to do because companies were turning to China because the product was cheaper in the first place
The hard data suggests option four, even on a small scale, has impacted China. The export sector in China had its worst monthly performance in more than two years, with goods shipped from China down 4% YOY. The soft data shows uncertaintyfrom both countries manifested as delaying investments and hiring as companies wait and see.
Impacts In The US And Beyond
Trade is just part of the story. Data coming out of China shows multi-sector deceleration ranging from luxury goods to manufacturing and the service industry. Alibaba, a good gauge of the Chinese consumer with data from hundreds of millions of shoppers, exemplified the trend with a drop in earnings in the latest quarter.
Caterpillar, Apple, and German-based Adidas all reported a negative shift in demand from China in their earnings report. A pullback in Chinese demand for technology, real estate, automobiles, etc. could signal global problems that could be felt domestically as well. Additionally, if investors start to get nervous about China’s sustainability, companies with a high exposure could see that reflected in their stock price.
It is not all doom and gloom. Trade talks appear to be progressing nicely and there is hope we will either reach a deal by March 1st or reset the deadline. The 6.6% annual GDP figure was above the target rate and is the highest among the five largest economies in the world. Lastly, just like we have highlighted for the US housing market- slowing is different than slow.
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