Together, China and the United States represent over 40% of the global GDP and two-thirds of the world’s military expenditures. Needless to say, every year, investors closely watch the developments on both sides of the Pacific.
But 2024 stands out in particular. Not only do these two economic powerhouses each present very uncertain prospects at the dawn of the new year, but the interactions between these giants could spark significant events in a politically high-stakes year.
China was the major economic disappointment of 2023. While sparks were expected after the abrupt halt of the “Zero CoVid” in December 2022, the country’s final growth will only slightly exceed the 5% mark—5.4% according to the latest estimates from the IMF, published last November. This is despite a very favorable comparison due to the stringent health restrictions that marked the year 2022.
The causes of this relative sluggishness are now well-known: a free-falling real estate sector with cascading bankruptcies and a continuous decline in both prices and volumes, households’ confidence at an all-time low with an urban household savings rate at 38% and an unemployment rate at 6.6%, compared to the 5% in official forecasts. Not to mention the lackluster enthusiasm of private enterprises, as indicated by PMI indicators hovering around the 50 mark.
Xi Jinping himself summarized the situation in December before the Politburo, stating that the Chinese recovery was “at a critical point.” Nevertheless, thanks to substantial liquidity injections from the central bank and credit stimulus through regional banks, the worst, namely a deflationary spiral, has been avoided so far. In fact, our Montpensier MMS Economic Momentum indicator, at 72, is firmly anchored in expansion territory, thanks to manufacturing production indicators.
Our MMS ( Montpensier Market Scan) for Chinese economic growth is accelerating at 72
Source: Bloomberg / Montpensier Finance as of january 2, 2024
Now it remains for the authorities to implement a plan to boost domestic demand to achieve an annual activity growth rate around 6%, compatible with the country’s ambition to reclaim its former position as the world’s leader, abandoned in the 19th century. This will be the economic challenge for China in 2024.
However, the year is likely to start under much more political auspices in the South China Sea. Indeed, on January 14, the presidential elections in Taiwan will take place, where the candidate from the ruling pro-independence Democratic Progressive Party (PDP), William Lai, is the frontrunner. Regardless of the winner, their initial statements and especially their stance towards Beijing will be closely scrutinized and could generate strong tensions in a region even more critical for the world than the heavily monitored Middle East.
This event will be particularly examined as it coincides with the official start of the long march of the Republican primaries in the United States on January 15 during the Iowa Caucus. This first, traditional but atypical, ballot opens an election year with very high stakes for the country and its relations with the major Chinese rival.
The rivalry with China is likely to be the subject of an escalation among the main candidates. If Donald Trump confirms his “super favorite” status of the Grand Old Party in the eight weeks between the Iowa Caucus in January and Super Tuesday on March 5, 2024, when more than a third of the Republican Convention delegates will have been chosen, fiery speeches could succeed each other in a competition to best protect national interests. From there to falling into pure protectionism, there is only a step, very easy to take during an election campaign.
However, markets, while appreciating Biden’s support for industry and Trump’s tax and regulation cuts, are wary of import taxes and other restrictions on global trade.
During Donald Trump’s first term, the various steps in the implementation of the “tariff war” desired by the 45th President caused corrections and a decline in economic morale indicators at the time. And Trump does not hide his desire to impose a 10% tax on all products imported into the United States, regardless of their origin.
These perspectives will be even more crucial as the American economic situation is more fragile than one might think. Despite a Montpensier Economic Momentum indicator at 54, thus in positive territory, thanks to the improvement in industrial production, signs of concern are multiplying.
Our MMS ( Montpensier Market Scan) for the Unites States is in positive territory around 54
Source: Bloomberg / Montpensier Finance as of january 2, 2024
Certainly, the American consumer, ultimately the main supporter of global growth in 2023, is still holding up – thanks to the drop in gasoline prices – and the initial reports from major credit card operators on holiday sales are positive. However, this momentum comes at the cost of a significant increase in the use of deferred payment mechanisms, which is never a very good sign. Fortunately, household debt remains much lower than before the 2007 financial crisis, preserving the future, but relying solely on American consumption to drive activity in 2024 is no longer feasible.
Moreover, the very strong fiscal support last year – up to a 6% annualized increase in the primary deficit in August – cannot be sustained given the highly tense discussions in Congress.
More worrisome is that businesses in the country are no longer optimistic: the ISM Manufacturing, a traditional leading indicator of the US economy, has just marked twelve consecutive months below the 50 thresholds, which generally translates to a recession – historically, only the year 1954 defied this statistic. Therefore, once again, we will have to rely on the Fed to alleviate pressure on the country’s economic fabric and loosen financial constraints on households. Jerome Powell announced the possibility of a new approach during the monetary policy meeting on December 14th. The markets have already strongly anticipated such a change, causing the yield on the US 10-year bond to plunge below 4%, far from the 5.2% reached at the end of October.
The continuation and amplification of this movement, necessary for a smooth landing of the US and global economy, can only happen if inflation continues to decrease. Thus, the revival of domestic demand in China, the market’s wildcard in 2024, needs to happen without exuberance to avoid inflating commodity prices in general, and oil prices in particular.
The Chinese “Year of the Water Rabbit” is ending in China; it has seen economic caution prevail over prosperity. The “Year of the Wood Dragon” is looming. Will the serenity of Wood compensate for the assertive and dominant nature of the Dragon? Let’s hope for a good balance for China, the United States, the world, and the financial markets. Happy New Year to all!
By Wilfrid Galand
