Growth in the world’s two largest economies started 2019 firmer than feared. China’s GDP in the first quarter was up 6.4 per cent on the year when the market expected a further modest slowdown, while US growth rose to an annualised 3.2 per cent when initial fears were that the government shutdown would hit spending, pushing growth beneath 1 per cent.
However, these upside surprises have not helped other countries. US and Chinese imports continued weakening despite GDP growth stabilising.
While US exports accelerated by an annualised 3.7 per cent, imports contracted by 3.7 per cent. Domestic demand increased by only 1.5 per cent, the smallest rise since 2015. Similarly in China, while other activities rebounded in March after the new-year holidays, imports continued to slide.
Elsewhere in the world, growth is disappointing, particularly in export-dependent economies. South Korea contracted in the first quarter of 2019 and Germany, which only narrowly avoided recession last year, has seen a renewed decline in manufacturing. Their exports seem to be suffering even more than other countries’ from weakness in China demand.
The downturn in world trade reflects slowing global investment and consumer spending but cars and electronics have fared particularly badly. These sectors account for about 35 per cent of Korea’s manufacturing production and vehicles alone are 20 per cent of Germany’s manufacturing output and 16 per cent in Japan.
Structural trends such as environmental concerns have hit new car orders but China last year also ended the tax rebates that boosted sales. Meanwhile cooling enthusiasm for smartphones has exacerbated the downturn in the electronics cycle and no upturn is expected until 5G phones are rolled out in late 2019 or 2020.
But while China’s first-quarter imports from Germany fell 1.3 per cent compared with 2018, purchases from France rose 27 per cent. And US imports from Germany fell 2 per cent while orders from France grew nearly 15 per cent thanks to aircraft and pharmaceutical sales.
Yet Vietnam saw the strongest acceleration in US import growth, reflecting a shift to lower-cost suppliers but also US-related trade tensions. And while South Korean and Taiwanese trade with China suffered, tariffs helped them to benefit strongly from US import demand, despite being electronics producers.
Historically, more than 10 per cent of Japan’s exports have been directly incorporated into China’s exports and its overseas sales have suffered. Taiwan’s exports of electronics components fell 19 per cent over the year as prices and volumes fell, and lower semi-conductor sales account for three-quarters of the fall in South Korea’s exports. Stronger exports to the US provide some compensation, however.
While US GDP growth may slow, underlying demand should now rise, implying firm import growth. Imports should also stabilise in China as the credit cycle bottoms and the fiscal stimulus takes effect with private investment supporting purchases of capital goods from Germany, Japan and South Korea.
Nonetheless, without strong broad-based investment recovery, import growth looks likely to stabilise rather than revive rapidly in the world’s major importers. Growth in the world’s major export-oriented economies will thus hinge on their ability to drive domestic consumption, which in many countries will be helped by fiscal stimulus.
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