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Outlook 2025
In the aftermath of the US election, our bumper “Outlook 2025” analyses what might drive financial markets next year.
Macro - China
15 November 2024
Lukas Gehrig, Zurich, Switzerland, Quantitative Strategist
The Chinese economy has slowed in 2024 and is forecast to grow by 4.8%. The outlook for 2025 is not bright, with gross domestic product (GDP) expected to expand by only 4%. At the heart of the troubled outlook is the consumer, who has seen their savings slashed since the bursting of a housing bubble in 2022, in turn hitting confidence and propensity to spend.
Source: Barclays Investment Bank, November 2024
Chinese household wealth has been slashed by 30% of late, with rising debt levels and stubbornly low levels of inflation (forecast to be 0.5% in 2024 and 1.2% for 2025). Japanification is a term often used by economists these days in relation to the country, due to the similarities between its economy of today, and the Japanese one after the bursting of its property bubble in the 1990s.
One economist, Takatoshi Ito, came up with a measure for the extent of Japanification evident in an economy. Applying this to the current Chinese figures, suggests, ironically, that the country has just overtaken Japan, (see chart).
The Japanification Index is a gauge for the macroeconomic trends that defined the drawn-out depression that the Japanese economy experienced after 19901
Sources: Bank for International Settlements, US Bureau of Labour Statistics, International Monetary Fund, Japanese Statistics Bureau, OECD, United Nations, Barclays Private Bank, October 2024
While the bursting of an asset bubble, debt-depressed consumers and deflationary risks indeed suggest similarities between China and Japan, there are also differences, both to the advantage and disadvantage of the former.
The leadership has the advantage of knowing the Japanese playbook, seeing how long the healing process can take, and understanding what extreme measures might be called for. It also has made technological advances in key worldwide industries (green tech and industrial digitisation).
On the downside, the Chinese population is ageing much faster than the Japanese population of three decades ago. Household budgets are more strongly affected, due to property making up double the share of household wealth, than it did for Japan.
Moreover, the latter’s crisis hit at a time of relative geopolitical calm, whereas China’s bust is unfolding with considerable turmoil around the world, that could spark a flurry of trade impediments in 2025. With the re-election of President Trump, we deem further escalation of trade restrictions and tariffs very likely.
The good news is that the People’s Bank of China is very much aware of the potential costs of doing too little, too late. The authorities unveiled in October that many measures from the counter-cyclical policy playbook were being considered or actioned, including recapitalising large Chinese banks, cash handouts to consumers plus a significant intervention in the housing market.
As a first step, in November Beijing announced a fiscal package to tackle local government debt problems. At the same time, austerity initiatives for public servants were put in place, with long-term debt sustainability in mind.
While the stimulus measures may be encouraging for the country’s short-term economic prospects, the long-term demographic outlook is depressing. China has one of the fastest-ageing populations, with the population aged over 65, ballooning from 12% of the total in 2020 to 20% by 2032, according to United Nations’ estimates2.
Worrying demographic trends and significant trade tensions put the Chinese leadership under a lot of pressure to act. Demographics, in particular, puts a lid on how high Chinese growth can go in coming years – the figure is potentially no higher than 5%.
However, that does not make the country uninvestable. To the contrary: a flurry of stimulus measures and a re-orientation of the nation’s industries leave ample opportunity to up exposure to the area. China has emerged as the world’s leading producer in many high-tech sectors, including solar panels, lithium batteries and wind-power equipment – a position that will be very hard to wrestle from it, despite all the trade tensions.
In the aftermath of the US election, our bumper “Outlook 2025” analyses what might drive financial markets next year.
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Originally introduced by Japanese economist Takatoshi Ito, the Japanification index has been expanded by Barclays Investment Bank to include China by replacing the harder to estimate GDP gap (the difference between the real growth rate and the potential growth rate) by the working age population gap instead. GDP gap estimates for the US and Japan for 2024 are based on OECD forecasts.Return to reference
United Nations, Department of Economic and Social Affairs, World Population Prospects 2024, October 2024Return to reference