Vaccines will jab holes in exporters’ sails

Lockdown boost to exports will fade…

The growing likelihood that effective vaccines will soon be available in major developed economies has brightened the global economic outlook. But an end to lockdowns and a revival of spending on services in major export markets will take the wind out of China’s recent export boom.

High spending on consumer goods in developed economies alongside demand for PPE and home-working equipment have been the drivers of the surge in China’s exports. China’s share of world exports has taken a step higher. (See Chart 1.)

Chart 1: China’s Goods Exports (% of world total, 3m sum, 2010 prices)

Sources: CPB, Capital Economics

As spending patterns in developed economies normalise, China’s share of world exports is likely to revert to the previous trend. We now assume that this will happen over the course of next year (and that the recovery in total world exports will slow too – world exports were down only 1% y/y in September according to CPB). On this basis, a slowdown in China’s export growth attributable to the global rollout of vaccines is likely to shave 0.5% pt off China’s economic growth next year.

… but domestic drivers will remain strong

However, we are not cutting our growth forecast. We’ve been more upbeat than most this year about China’s near-term prospects. Recent data have still been stronger than we had expected. We estimate that China’s economy last month was expanding at a substantially faster rate in y/y terms than it would have had the coronavirus never appeared – the fastest growth in three years. (See Chart 2.)

Chart 2: China GDP (Q4 2019 = 100)

Sources: CEIC, Capital Economics

Economic behaviour has now returned to normal in almost all of China’s retail and broader service sector, which had been slower to recover: by October, seven months after Wuhan was released from lockdown, activity in services had returned to the same y/y growth rate as late last year. And stimulus lifted growth in other parts of the economy – investment and construction activity in particular above the pre-crisis rate.

We’ve pushed up our forecast for 2020 growth from 0.0% to 0.5% to reflect this strength. Other things equal, this would carry over into faster growth next year, but the size of the boost is about the same as the drag we’re expecting from exports. We therefore continue to expect China’s economy to expand 10% next year.

We can’t gauge exactly where this puts us relative to consensus since most analysts focus on official GDP. We suspect we’re still on the optimistic side for the near term though. The current consensus for GDP growth next year is 8%. An upbeat view also informs our expectation that the PBOC will push its policy rates higher next year.

The week ahead

We think next week’s PMIs will show that growth in manufacturing picked up slightly while the recovery in services activity slowed this month.

Data Previews

Manufacturing PMIs (Nov.) Mon. 30^th Nov./ Tue. 1^st Dec.

Industrial growth continues to accelerate

The manufacturing PMIs have continued to rise in recent months (see Chart 3), thanks to strong exports and a recovery in demand domestically. We think this momentum continued into November.

Admittedly, the new orders component of the Standard Chartered SME survey fell a touch in November. But there are signs from the flash PMIs of China’s major trading partners that foreign demand continued to improve this month. What’s more, industrial metals prices have risen in recent weeks. Taken together, growth in the broader manufacturing sector may have picked up slightly.

Chart 3: Manufacturing PMIs

Sources: CEIC, Markit, Capital Economics

Non-manufacturing PMIs (Nov.) Mon. 30^th Nov./ Thu. 3^rd Dec.

Pullback in car and property sales hints at slower services recovery

The services PMIs have risen since a dip in August. But we think the pace of the recovery probably slowed a bit last month.

Most signs suggest that the recovery in services activity has continued as the negative shock to the labour market has almost fully reversed. But high frequency data hint that the pace of improvement has eased. Both car and property sales fell back in November. (See Chart 4.) Pent-up demand from better-off households may be fading. Tighter borrowing restrictions may also be starting to weigh on property sales.

Meanwhile, we expect the construction index of the official PMI to remain elevated but drop back slightly. Local governments are likely to have stepped up infrastructure spending in order to meet budget targets. But this was probably offset by weaker housing starts in response to tougher restrictions on borrowing by developers.

Chart 4: Car & Property Sales (% 3m/3m, seas. adj.)

Sources: Wind, Capital Economics

Economic Diary & Forecasts

Upcoming Events and Data Releases
Date	Country		Release/Indicator/Event	Time (China)	Previous*	Median*	CE Forecasts*
November
Mon 30th		Chn	“Official” Manufacturing PMI (Nov.)	(09.00)	51.4	51.5	51.6
		Chn	“Official” Non-Manufacturing PMI (Nov.)	(09.00)	56.2	56.0	56.0
December
Tue 1st		Chn	Caixin Manufacturing PMI (Nov.)	(09.45)	53.6	53.5	53.8
		HK	Retail Sales (Oct.)	(16.30)	(-12.9%)	(-10.0%)	(-10.0%)
Thu 3rd		Chn	Caixin Services PMI (Nov.)	(09.45)	56.8	56.2	56.5
Selected future data releases and events:
December
Mon 7th		Chn	Trade Data (Nov.)
		Chn	Foreign Exchange Reserves (Nov.)
Wed 9th		Chn	Inflation Data (Nov.)
Also expected during this period:
10th – 15th		Chn	M2 Money Supply (Nov.)
10th – 15th		Chn	Net New Lending (Nov.)
10th – 15th		Chn	Aggregate Financing “AFRE” (Nov.)
10th – 18th		Chn	Foreign Direct Investment (Nov.)
TBC		Chn	Vehicle sales (Nov.)
TBC		Chn	CBRC Data on Financial Institutions (Assets, Earnings, NPL, Nov.)
TBC		Chn	Job Openings to Job Seekers Ratio (Q3)

Mark Williams, Chief Asia Economist, mark.williams@capitaleconomics.com
Sheana Yue, Assistant Economist, sheana.yue@capitaleconomics.com