Recently market concerns have shifted from political issues surrounding US and China trade wars and the long and drawn out process of Britain’s exit from Europe to concerns over a slowdown in growth of the world’s two largest economies – the US and China.
A slowing US economy doesn’t come as a great surprise, given the cycling of last year’s corporate tax cuts and with their economy running at what is considered full employment.
China on the other hand is a country that is difficult to know exactly where it is up to, given the reliability and the opaque nature of the data. What we do know is that the Chinese economy is slowing, with reports suggesting that GDP growth for the last three months of 2018 expanded at a rate of 6.4 per cent from a year earlier. That was down from 6.5pc in the previous quarter, being the weakest quarter since the GFC. This was however in line with consensus forecasts.
What has been more concerning throughout the duration of this month though, has been the number of US companies that have missed forecasts and/or downgraded future earnings expectations in reporting their fourth quarter earnings results, due to slowing sales growth in China.
The most notable of these is the world’s largest company, Apple, which downgraded first quarter revenue forecasts to $US84m from $US93m previously, due primarily to weaker iPhone sales in China. CEO Tim Cook said “We did not foresee the magnitude of the economic deceleration, particularly in greater China.”
China’s economy began to slow in the second half of 2018, noting that the Chinese government reported GDP growth during the September quarter that was the second lowest in the last 25 years.
“We believe the economic environment in China has been further impacted by rising trade tensions with the US,” Mr Cook said.
There have been numerous other large global US-based business that have also experienced slowing sales growth in China. Ford’s sales in China fell more than 30pc during the first 11 months of 2018 when compared to 2017. You would have to go back to the Asian financial crisis of 1998-1999 to see a decline in sales for a period of four months or more in China.
Caterpillar’s (one of the largest equipment manufacturers in the world) quarterly report this week added further concerns surrounding a slowing Chinese economy, posting weaker than expected earnings and issued disappointing earnings guidance, citing limited growth in China over the year ahead.
Given China is Australia’s largest trading partner, this is concerning. However, given China has a history of simulating their economy when things slow, it wouldn’t be surprising to see that the market already has these concerns factored in and things begin to improve from here, particularly if the US and China are able to negotiate trade terms and settle their ongoing trade wars.
- Justin Still Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
