What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
The Hong Kong economy is in recession.1 In the third quarter, real GDP fell sharply for the first time in a decade. The decline is, in part, a reflection of foreigners avoiding Hong Kong because of the unrest that has disrupted the society there for the past six months. The city-state depends heavily on tourist traffic, but in the third quarter, tourist arrivals were down 16 percent from a year earlier. Visits from neighboring China, which accounts for about 70 percent of tourists, fell 29 percent. This led to a 20 percent decline in retail sales in August versus a year earlier, the sharpest decline on record. The hotel occupancy rate in Hong Kong, which had been as high as 95 percent in late 2018, fell to 63 percent in September.
In addition to tourists, Hong Kong also depends on its role as a transit hub for goods leaving or entering China. But trade is also down, mainly because of the impact of the US-China trade dispute. In the three months leading up to October, imports into Hong Kong were down 11 percent and exports were down 8 percent. Besides, exports to the United States were down 24 percent in September versus a year earlier.
The future of the trade situation will depend, in part, on whether the United States and China can reach an interim trade deal before the end of the year. US President Donald Trump said that a deal is near. Specifically, he said, “I have a very good relationship, as you know, with President Xi. We’re in the final throes of a very important deal—I guess you could say one of the most important deals in trade ever. It’s going very well.”2
Meanwhile, Trump signed a bill3 passed nearly unanimously by the US Congress mandating sanctions on China if it interferes with Hong Kong’s autonomy. While the bill is mostly symbolic, it is clearly very important. Otherwise, the government in Beijing would not have been so critical of it. Beijing has complained that the bill represents interference in the internal affairs of China. Some observers were worried that if Trump signed the bill, it would reduce the likelihood of China agreeing to a trade deal. However, following Trump’s decision, Beijing criticized the US Congress regarding the bill but did not criticize Trump. This was seen as evidence that Beijing still wants to find common ground on trade and will not allow the bill to interfere with that goal. Meanwhile, Trump’s decision was greeted by euphoria in Hong Kong. The protestors see the US bill as signaling that the world’s richest country will not stand by idly should China crack down on the protests.
Why did Trump sign the bill? Apart from whether he thought the bill to be good public policy for the United States, there were likely other factors at play. If Trump had vetoed the bill, it would’ve been very likely that his veto would have been overridden by the Congress, thus embarrassing the president and weakening his leverage with China. Signing the bill enabled him to be on the side of a popular issue while, at the same time, signaling to Beijing that he may not make significant concessions in order to achieve a trade deal. Statements from negotiators on both sides suggest there has been progress on trade. However, these statements ought to be taken with a grain of salt. There have been episodes in the past year in which it appeared that the negotiators were close to a deal, only to have either Trump or Xi change their minds about what they were willing to do. That could still happen. So, the uncertainty continues.
In any event, the question remains as to what will happen to Hong Kong. Recently, there were district council elections in Hong Kong that resulted in a strong showing for pro-democracy parties. While the councils don’t have vast power, the polls themselves indicate popular sentiment and could circumscribe the ability of the government to act against the protestors. Here are the facts:4
The importance of this election is that more than two million people voted against Beijing. This fact makes it difficult to imagine Beijing taking violent action to quell the unrest—that could turn Hong Kong into a new Belfast or Beirut. On the other hand, the fact that pro-democracy parties did so well is now expected to quell the protest movement—at least temporarily. In a sense, the election represents a release of pressure. As such, equity prices initially rose on expectations that the polls would lead to a more peaceful situation.
In the longer term, unless the protestors obtain the democratic reforms they desire, it seems likely that the protest movement will continue. This leaves Beijing in a quandary. If it sends in troops to crack down on the protests, it could further undermine Hong Kong’s economy, which would reverberate in China, which, in turn, depends on Hong Kong’s role as a financial intermediary with the rest of the world. Cracking down would also damage China’s reputation in Taiwan where it hopes to convince the people that a one-country two-systems approach can work. On the other hand, China can hardly agree to democratic reforms in Hong Kong if it is not willing to do that on the mainland. So, what can it do? One option is to simply do nothing. That is, it can let the protestors stew in their own juices, thereby undermining Hong Kong’s economy. Meanwhile, it can take steps to develop Shenzhen and/or Shanghai into major financial centers which could effectively replace the central role of Hong Kong as China’s financial intermediary with the world.
In recent months, some indicators have suggested that the global economy may be bottoming out and that the downturn in economic activity is starting to reverse. However, some of the latest data on trade suggests otherwise. Specifically, the CPB World Trade Monitor reported that in September, the global volume of trade fell 1.3 percent from the previous month. In addition, the volume of trade was down 1.1 percent from a year earlier,5 the fourth consecutive month of declining trade. This figure has declined in six of the last 10 months. The decline in global trade volume was, not surprisingly, led by the United States and China. In the United States, imports fell 2.1 percent from August to September. In China, imports fell 6.9 percent. Bilateral trade between the two countries is declining at double digit rates.
Why is this data important? The answer is that trade drives economic activity, especially business investment. Indeed, we have seen declining investment in many economies, especially the United States. The decline in trade reflects rising obstacles to trade, decelerating demand, and changes in the structure of global supply chains. All other things being equal, the decline in trade will reduce the growth of global GDP. This has already happened. Plus, the decline in trade does not appear to be reversing, indicating that the troubles in the global economy are not waning away.
Meanwhile, the European Union (EU) has seen a more pronounced weakening of trade than other developed economies, according to the latest data from the Organisation for Economic Co-operation and Development (OECD).6 The OECD said that global trade declined in the third quarter of 2019 but noted that “the slowdown was particularly pronounced in the European Union, with exports contracting by 1.8 percent and imports by 0.4 percent. Exports and imports fell across all major EU economies, with declines of 3.6 percent and 1.7 percent, respectively, in France, and of 0.4 percent and 1.8 percent, respectively, in Germany.” The OECD also said that exports increased modestly in China and Japan but fell modestly in the United States. Imports for China and Japan declined. Exports declined in major emerging countries including India, Brazil, and Mexico.
What explains the relative weakness in Europe? There are several factors hurting European trade. First, weaker demand overseas, especially in China, has hurt German exports of capital goods. Moreover, there has been a synchronized slowdown in business investment around the world, thereby hurting Germany (especially). Second, trade uncertainty has hurt business investment in Europe and the United States. A survey by the European Investment Bank7 found that 70 percent of businesses in the EU and the United States said that trade uncertainty is a reason to cut back on investment. The uncertainty is mostly driven by the US-China trade dispute. Third, German businesses are uncertain about trade between the EU and the United States, especially given the US threat to impose tariffs on German automobiles and the recent tit-for-tat tariff increases made by both the United States and EU. Fourth, Brexit uncertainty is taking a toll as well, and is not likely to go away even if Britain exits the EU in January.
Finally, one important indicator of the health of the global economy is the health of Singapore. Indeed, a Deloitte leader in Asia Pacific recently said that if you want to see what is happening in the global economy, look at Singapore. So, let’s take a look: The latest data show that Singapore’s manufacturing output increased 4.0 percent in October versus a year earlier, the biggest increase since November 2018.8 There were big increases in pharmaceuticals (up 29.6 percent), consumer electronics, computer peripherals, and data storage. In addition, there was a modest 0.4 percent gain in overall electronics, a big change from sharp declines in the previous two months. And although semiconductor output declined 0.9 percent, it was far better than in the previous month. Singapore is an export-driven economy, so these figures suggest the possibility that global demand, especially from China, is picking up—although export volumes continue to fall. Notably, China’s purchasing manager’s index (PMI) for manufacturing just rebounded. On the other hand, Singapore’s minister of trade and industry warned that “the journey ahead is still long. The world’s many uncertainties remain. Singapore can be easily affected by the many downside risks.”
In China, household debt has been rising, reaching levels normally associated with much more affluent economies. The central bank has indicated concern.9 It said, “The debt risks of the household sector and some low-income households in some regions are relatively prominent and should be paid attention to.” According to the central bank, household debt is now roughly 60 percent of GDP in China. Compare this with 75 percent in the United States and 50 percent in Western Europe.
Besides, Chinese household debt is now roughly 100 percent of Chinese household income. Debt as a share of GDP has roughly doubled since 2012. This increase has fueled consumer spending, which, in turn, has helped offset the negative consequences of the trade war. However, the lion’s share of household debt in China is mortgage related and reflects the fact that the government has periodically encouraged property investment in order to stabilize economic growth. Plus, roughly two-third of the mortgage debt is held by households that own more than one property. That is, a lot of the increase in debt can be attributed to households engaging in property speculation. This is reflective of the fact that many households see property as a good vehicle for generating non-wage income.
Consequently, the central bank has said there should be restrictions on bank loans used for property speculation. It also called for greater scrutiny of borrower income and credit worthiness and said more should be done to educate lower income households about the risks of borrowing. For China, the sharp rise in household debt poses a risk to financial stability should there be a further economic slowdown.
In October, personal income in the United States barely grew while consumer spending grew modestly.10 However, spending on durable goods declined, indicating consumer caution. Let’s look at the details of the latest income and expenditures report from the US government: