As China and the US came close to conclude the talks on the first phase of the trade deal, a stronger Manufacturing activity in China has coincided. A Chinese official statement by the National Bureau of Statistics declared that the Purchasing Managers’ Index (PMI) has remained at 50.2 in December. It should be noted that PMI’s figure above 50 points hints at the expansion of the manufacturing sector. Chinese manufacturing has been on an expansion mode for the last two months.
As per the new PMI readings, production in China has been on the rise for the last year. However, demand in terms of new orders stands lower than the recent high recorded in December. The expansion of the manufacturing sector has led the Chinese economy to 2020 with a strong arm. However, its sustainability is still being questioned.
Analysts from Nomura said, “The extended strength in the official manufacturing PMI certainly looks positive for markets, but we believe this may not be sustainable, and the economy has yet to hit the bottom.” Yet, Nomura has revised the GDP growth forecast for the last quarter from 5.8 percent to 6.0 percent.
Though the increment in the PMI might be attributed to loads of things, some major ones include heightened demand due to the upcoming Lunar New Year and the conclusion of talks on Phase-1 of the China-US trade deal.
As per a senior statistician with the National Bureau of Statistics of China, there has been a soar in the demand and production in China due to the upcoming Lunar New Year event that is to happen in late January. It is observed for almost 15 days when all major activities of the Chinese economy stalls.
As per the Bureau, production specific to the textile, pharmaceutical, and auto and telecom equipment industries has grown significantly. It also hints at the increased confidence of the companies to stock up goods in inventories for demand hike on the Lunar New Year event. Along with the manufacturing sector, the retail sector has also outperformed earlier predictions.
Another significant factor for Chinese manufacturing growth remains the pace of trade talks between the U.S. and China. This has helped in the increment of confidence amongst the investors and manufacturers. Especially, export orders are on the rise for the past few months.
Both nations have announced that phase one agreement may be soon signed, which may lower some American tariffs and lead to the higher purchase of American goods by China. This seems to be a great advancement as in the long-term, these measures are likely to pay off.
Recently, White House trade adviser Peter Navarro said that the above deal would be signed in the second week of January and the signing may see the presence of Chinese Vice-Premier Liu in the United States.
However, China is yet to stabilize its widespread job losses. Almost 25 million jobs have been lost in China between 2014 and 2018. Its construction sector is struggling along with its small scale industry that accounts for most of the job losses. Though China is doing fine in the service sector to compensate for the losses in the construction sectors, it seems not sufficient.
The American Struggle
Former Federal Reserve Chairman Alan Greenspan recently said that the growing budget deficit in the United States is likely to increase the inflation rate. He said, “Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise.”
As of now, the United States has a well-controlled inflation rate below 2% for a while and this 2% mark is considered good for a growing economy. The chances of a weakened American economy has come, even though the rate of unemployment is still at 3.5%. In this trinity of problems, the Philips Curve needs to be reviewed that says Inflation is likely to rise as the unemployment rate increases.
Recently, the U.S. President has called the Fed to cut the rates further though Trump has not been able to retain the budget deficit to a comfortable level. Greenspan termed the tweet of Trump as inappropriate.
Would be sooo great if the Fed would further lower interest rates and quantitative ease. The Dollar is very strong against other currencies and there is almost no inflation. This is the time to do it. Exports would zoom!
— Donald J. Trump (@realDonaldTrump) December 17, 2019
“He’s wrong in even discussing the issue,” Greenspan said. He further added, “The Federal Reserve is a very professional outfit. They know more about the economy’s functioning, how it affects the money markets and the interest rate structure, far more than he does. … The best thing to do is to just disregard it. … I’m sure it was ill-advised.”