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U.S. tariffs have delivered an early foreign policy dilemma to new UK Prime Minister Andy Burnham, who has to decide whether to follow the lead of his predecessor Keir Starmer and attempt to placate President Donald Trump or to try to forge a potentially expensive centre-left path, a former senior UK diplomat told MNI.
Burnham is due to host Trump when the UK chairs the G20 next year, and has already invited the U.S. president to visit Manchester, former permanent UK representative to the EU Sir Ivan Rogers noted in an interview.
The 10% tariff announced on imports from the UK and dozens of other countries, for allegedly failing to prevent imports produced using forced labour, were entirely predictable, Rogers said.
“We are back into the question of does Burnham act in essentially a rather similar way to Starmer and try and do a better and earlier deal? In a sense you're just going back to going back to the status quo," Rogers said. "But is there much mileage in that? What do you deliver via that? Can the UK afford actually structurally to be in much of a different position from Starmer.”
Washington could use negotiations over trade to further try and force London to a more closely aligned China policy, said Rogers, though he saw a good chance that the new tariffs will also be struck down by the U.S. Supreme Court. While the new levies do not much affect the relationship between London and Washington, in his view, they add to uncertainty.
"Bear in mind the U.K. chairs the G20 next year, which will be a big moment on the world stage for Burnham. So he's got this rather difficult balancing act of demonstrating to his own party and to his supporters and to his base that he's prepared to be tougher with the U.S. than Starmer was and repositioning the party as a genuine party of the center left.”
CONTINUITY
On the surface, Downing Street's trade negotiating team is unchanged under Burnham, with Varun Chandra remaining in the trade representative role. Chandra’s continuity in the role, and the expected appointment of Karen Pierce, a former UK ambassador to the U.S., to a senior Foreign Office role, could help smooth communications with Washington, which has been angered by Burnham’s appointment of former Energy Secretary Ed Milliband as his foreign secretary.
"They're probably slightly horrified that he's turned up as Foreign Secretary. Would the Miliband/ (Marco) Rubio relationship work well? Quite hard to see it working terribly well, but you know, Karen, if she emerges as the Permanent Secretary, may be instrumental in trying to keep that relationship going," said Rogers, who also served in the Cabinet Office under a previous Labour government.
Jul-24 13:52
Renationalising Thames Water would help the UK government to meet one of its fiscal rules, while making it harder to meet the other, although the different options available to deal with the heavily-indebted company would likely have little impact on inflation, a former chief accountant for National Grid plc told MNI.
Revenue from a nationalised Thames Water would feed into government coffers, Martin Wheatcroft noted in an interview.
Renationalisation "should be positive for your ...current budget surplus [by 2029/30], which is the first fiscal rule ... but it should be negative for ... the second fiscal rule, which is to have capital investment under control [by 2029/30]," Wheatcroft said.
Servicing costs on Thames Water's debts approaching GBP20 billion are driving the business cash-negative, leading to speculation as to whether the government will renationalise the company, put it into special administrative measures, or tighten regulation. Andy Burnham pledged to "build a new economy where we put life's essentials back under stronger public control," after becoming Prime Minister on Monday.
"Thames Water arguably is not worth very much at all because it is cash negative. So you could argue it may not even have a positive value, but acquiring its debts would add to debt stock," Wheatcroft said.
"The bigger issue though is that generally once you bring these businesses into the public sector, they become subject to the process of capital investment controls in terms of what the Treasury does to them.” (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift- ex-OBR's King)
ALTERNATIVE PATHS
Temporarily placing the company into special measures should not affect the fiscal picture, he added.
"That happens in the private sector all the time. We don't bring the companies into the balance sheet purely because it's a government-appointed administrator. It would only be if we decided that the best way to deal with this is for the government to become an investor," he said.
"In theory, the ownership shouldn't really determine the household bills because it's determined really by regulators setting the [pricing] formula."
Private owners might react badly to an attempt to change the formula, he said.
"The challenge is that if you want to bring bills down, you either need to subsidise, and there isn't much money around generally in the public finance of the moment, so that's not really a sensible use of public resources. Or you cut investment, and of course, you know the real issue at the moment is there's been under investment." (See MNI INTERVIEW: UK Energy Price Aid Could Be Cheaper This Time)
Household water bills comprise 1.176% of the Office for National Statistics' CPI weights. The latest UK inflation print was 2.6%, the lowest since March 2025 and above the Bank of England's 2% target.
Jul-24 10:36
The Federal Reserve’s dot plot is fundamentally flawed, but replacing it with a consensus forecast comes with major structural hurdles, former Bank of England Deputy Governor Charles Bean told MNI as new Chairman Kevin Warsh prepares to take a fresh look at how the Fed conveys policy deliberations and decisions in an uncertain economic climate.
The Summary of Economic Projections is an "unsatisfactory comms device" because it creates false certainty and blurs critical distinctions, said Bean, who previously served alongside former BoE Governor Mervyn King, one of three leaders of Warsh’s communications task force.
"It conflates a view of the economic outlook together with the appropriate policy response to it -- the 'reaction function.' Both of these can differ across committee members, and ideally, you want to unpick them," Bean said in an email interview.
Echoing critiques from King, whose view that central bank rate-forecasting damages credibility given genuine uncertainty aligns with that of Warsh, Bean nevertheless noted that the FOMC as a whole may resist abandoning the established framework. Warsh has said he won't submit forecasts to the dot plot as chairman.
If the Fed were to scrap its rate projections, finding a suitable alternative won't be straightforward, Bean said. He's skeptical the Fed could adopt a Bank of England or Riksbank-style consensus forecast model due to the decentralized structure of the U.S central bank.
The FOMC comprises 12 regional Fed presidents, only five of whom vote at any given time, making joint consensus modeling logistically complex, he said. (See MNI INTERVIEW: Warsh Could Overhaul SEP, Drop Dot Plot - Lewis)
ALTERNATE PATHS
Bean advocates using conditional scenario analysis featuring alternative interest rate paths.
King has warned central banks can harm their credibility by forecasting unpredictable future rate paths. But Bean said: "Mervyn’s credibility issue arises primarily because the future is highly uncertain, and not so much because policy may differ somewhat for a particular path for the economy. Talking about potential policy choices conditional on a particular economic scenario unfolding is not subject to the same shortcoming."
Explicit commitments by the central bank during normal economic cycles are unnecessary, but forward guidance may still be useful in extreme conditions, Bean said.
"It’s potentially useful at the interest rate effective lower bound, not so much in normal times. Same with quantitative easing of course," Bean said. "So keep it as an emergency weapon." (See MNI INTERVIEW: Warsh Set To Dial Back Fed Guidance - Swanson)
Jul-24 09:23
Better weather, an England World Cup run and a "Burnham bounce" all helped UK consumer confidence recover in July, but plenty is needed from the government to maintain the sentiment boost, the head of leading survey group told MNI.
There were "hopes at the start of July that the Middle East conflict might stabilise and bring UK fuel prices down," Neil Bellamy, Consumer Insights Director at GfK, said, adding that "the feel-good factor of the FIFA World Cup, and the summer heat wave" all helped reinforce a pick-up in sentiment.
And while former Manchester mayor Andy Burnham didn't take over in 10 Downing Street until just after the current survey period ended, "the sense of a fresh start following the appointment of a new prime minister surely accounts for some of this bounce," Bellamy said.
The headline GfK Consumer Confidence Overall Index Score was up six points to -17 in July, the largest month-on-month points increase in consumer confidence since November 2023.
However, Bellamy underlined that the improved Overall Index Score remained within the narrow range seen since the end of 2023, and that it is now a decade since the headline score was in positive territory. UK growth is flatlining, he noted. (See MNI INTERVIEW: Even UK Young Pessimistic On Consumption - GfK )
CHALLENGES
For the “Burnham bounce” to be sustainable and boost consumer confidence, it will require consistent delivery by the refreshed UK government against deep cost-of-living challenges and persistent low economic growth," Bellamy said.
Underlining the improvement in consumer confidence, the Major Purchase Index increased eight points to -12 in July, which is three points higher than July last year. However, The Savings Index -- often reflective of consumer unease but not a full component of the overall index -- is up seven points to +27.
Chinese policymakers are likely to rely on targeted support in H2 rather than broad-based stimulus despite Q2's slowdown, with the economy still on track to meet this year's 4.5-5% GDP growth target, advisors told MNI, adding any additional special treasury bond issuance would likely total less than CNY1 trillion.
Authorities can achieve the target provided they maintain the current "proactive fiscal stance" and accelerate budgeted spending, and infrastructure project landing, in the absence of drastic changes in the external environment, said Zhao Xijun, co-dean of the China Capital Market Research Institute at Renmin University. Zhao rejected calls from some economists for up to CNY2 trillion of additional special treasury bond issuance after Q2 GDP growth slowed to 4.3%, arguing policymakers are more likely to focus on implementing existing measures than unveiling fresh stimulus. With H1 growth at 4.7%, the economy remains on track to meet the annual target, he said.
General public budget expenditure rose 1.5% y/y in H1, behind the budget's implied 4.4% pace, while revenue increased 4.7%, resulting in an increase of CNY971.5 billion in fiscal deposits in H1, Zhao noted.
Lian Ping, director of the China Chief Economist Forum, expects any additional special treasury bond issuance to total CNY500 billion-CNY1 trillion moderately, while calling for the consumer goods trade-in programme to be expanded to cover services. Fiscal policy remains substantially supportive while authorities should accelerate planned government investment projects, Lian said, noting that slower issuance of local government bonds and stricter project management were key factors dragging down fixed-asset investment in Q2.
"It is unlikely to roll out another round of stimulus of the same magnitude – systemic and comprehensive in scope – as the one introduced in H2 2024," he said. (See MNI INTERVIEW: China's Econ Restructure Needs More Support)
MONETARY POLICY
Both advisors questioned the effectiveness of a broad-based interest rate cuts despite rising expectations for further PBOC easing, arguing monetary policy has relatively limited scope to revive the weak consumption and investment that dragged on Q2 growth.
While Lian did not rule out a symbolic 10-15bp policy rate cut, he said policymakers would proceed cautiously, as weak credit demand and imported inflation risks stemming from uncertainty in the Gulf could reduce its effectiveness. Instead, the PBOC is more likely to maintain ample liquidity through multiple tools to lower banks' funding costs and guide market interest rates lower, he added, pointing to the central bank's record CNY1.4 trillion six-month outright reverse repo operation in mid-July.
REAL ESTATE
Rather than cutting policy rates, authorities could drive down the five-year Loan Prime Rate – the benchmark for many mortgages – and guide commercial banks to reduce mortgage rates via regulatory requirements, Lian argued.
The property downturn continues to weigh on consumption, while signs of stabilisation remain weak and largely confined to a handful of major cities, he added. However, banks have limited room to lower mortgage rates without undermining profitability, reducing the effectiveness of such a policy. "Banks need to maintain profitability to deal with non-performing assets," Lian continued.
Gong Liutang, director of the Institute for Advanced Study at Wuhan University, said there is scope to cut the five-year LPR by 10-20bp from the current 3.5%, which the PBOC left unchanged this week for a 14th straight month. He also called for further reductions in outstanding mortgage rates to help repair household balance sheets.
The weighted average interest rate on newly issued housing loans was about 3.1% nationwide in June, compared with 2.6% for first-home loans above five years financed through the housing provident fund.
Zhao argued, however, that lower borrowing costs alone would not revive housing demand given the quality of existing housing supply. Because repairing household balance sheets will take time, authorities should simultaneously support other asset prices, particularly by encouraging stable long-term capital to flow into the stock market, helping offset losses in the property sector, he concluded.
Jul-24 04:07
The Reserve Bank of New Zealand is likely to need to lift the Official Cash Rate from its current 2.5% to around 4% by the middle of next year to return core inflation to the 2% midpoint of its target range, former senior adviser Leo Krippner told MNI, adding that the Bank's estimate of the neutral rate is too low.
Krippner, now a research fellow at Singapore Management University, said the RBNZ's assumption that the OCR would peak at around 3.3% underestimated the amount of tightening required, reiterating his argument from 2025 that the neutral rate is closer to 3.75%-4.0%. (See MNI INTERVIEW: RBNZ's Neutral Estimate Too Low - Ex-Economist)
"The OCR needs to move above neutral to put sufficient downward pressure on core inflation," he said, noting that underlying price pressures remain stubborn, with core inflation still running around 2.5% in Q2, despite the 4.1% headline inflation read broadly in line with the Bank's May forecast.
"The Bank clearly recognises it still has work to do, but its projected peak in the OCR looks curious given inflation remains above target," Krippner argued.
Financial markets currently expect the OCR to reach around 3.5% by May 2027, but Krippner argued even that may prove insufficient. Without moving policy into restrictive territory, the Bank would instead have to rely on spare capacity, including a negative output gap and elevated unemployment, to complete the disinflation process.
FINAL HALF-PERCENT
Krippner said that central banks consistently underestimate how difficult it is to reduce inflation from around 2.5% to their 2% targets. "It's just whether or not they want to make the effort of getting the last half percent down to 2%. At the moment, their forecasts do have it going down to 2% but that's almost automatic. If you're not going above neutral, then how much downward pressure are you actually putting on inflation to wring that last half a percentage point out?"
He said core inflation does not typically fall by itself. "You have to do the work if you're serious about returning inflation to target," he added, warning a failure to eliminate the remaining inflationary pressure could ultimately lift long-term price expectations and bond yields.
"At the moment, I don't think central banks should be anticipating that inflation will naturally come down," he continued. "If markets conclude central banks are content with inflation settling around 2.5% rather than 2%, long-term interest rates will remain structurally higher." Higher government borrowing worldwide is already pushing up term premia, while persistent above-target inflation would add a further upward bias to longer-term rates, he said.
POLICY RESPONSE
Krippner said the RBNZ eased too aggressively when it cut the OCR to 2.25%, and that policy remained well below neutral settings despite core inflation staying above target.
He also questioned why policymakers waited until July to begin tightening after signalling in May that higher rates would be required. (See MNI RBNZ WATCH: Financial Conditions Prompt OCR Hike To 2.5%)
"If the Bank already knew more tightening was needed, it would have made more sense to begin earlier." Nevertheless, Krippner welcomed Governor Anna Breman's governance reforms, particularly greater transparency around individual votes and the restoration of eight policy meetings a year.
Jul-24 02:22
Mark Carney will resist Donald Trump's new "pressure tactic" of threatening more tariffs and is prepared to walk away from a new trade deal instead of offering major concessions, a former finance department colleague told MNI.
“Carney understands power, and he understands that the only way to deal with Trump is not to cave in,” said Julian Karaguesian, a McGill University lecturer who has been a special trade adviser at the finance department and an economic adviser at Canada's embassy Washington. "If we cave, they will come for more.”
Resisting Trump demands over the month before new tariffs on CAD30 billion of exports is possible because Carney's political support is stronger than the U.S. president's, Karaguesian said. American claims of not needing products from north of the border is also undercut by signals that officials want access to Canada's critical minerals, energy and aluminum, he said.
China countered U.S. threats cutting off critical mineral supplies, which was more successful than offerings by leaders in Germany, France and the UK, Karaguesian said. “I think that behind closed doors Washington is asking in the context of CUSMA for privileged access to our water, our critical minerals, our uranium and our oil and gas,” he said.
Canada's resistance is boosted because the economy avoided a recession many investors predicted after the first round of U.S. tariffs, he said. Inflation is also lower than in the United States even though the response to the first round of tariffs was dollar-for-dollar countermeasures. Carney's plan to double non-U.S. exports further boosts Canada's cause over the next few years, he said. (See: MNI INTERVIEW:Export Rebound Gives BOC Scant Reason To Cut-EDC)
SAVING RUST BELT VOTES
“He’s got another three years in his mandate, and so I think if we have to take more hits from the Americans as we develop our relationships with China and Europe, that by the end of the three years Carney’s calculating we may have new sources of growth.”
Trump sought a quick win to show strength to voters ahead of Congressional mid-term elections, contrasting with setbacks at the Supreme Court on tariffs and with the Iran war, Karaguesian said. New tariffs are a "pressure tactic" in the short run but Karaguesian said the U.S. will come back with bigger demands as talks pick up. “They still see squeezing us as the path of least resistance to some kind of concessions victory,” he said.
An inability to compromise on major sticking points like autos, steel, digital taxes and dairy subsidies leaves little prospect of a breakthrough anytime soon, Karaguesian said. “I don’t think they are going to give back steel because steel is in the Rust Belt states, and those are swing states.” (See: MNI INTERVIEW: Carney-Trump Deal Will Include Tariffs-Chamber)
Carney would likely pay a political price if he erodes Canada's "supply management" of dairy and poultry, Karaguesian said, which is popular in vote-rich Quebec.
RUTHLESS GREAT POWER
Canadian leaders are also missing the bigger point that the U.S. has been "thickening" the border with its northern neighbor since the 9-11 terror attacks, he said.
“I don’t think a broad deal can be worked out, unless we’re willing to have a completely asymmetric trade deal where we give a lot of concessions,” he said. “Unless Trump caves in and they relent a bit on us, I don’t just see a successful agreement in the near future.”
One area where Canada could give up something without much pain is participating in supply chains with the Detroit-based automakers, Karaguesian said. Most of Canada's domestic assembly is now done by Japanese-based firms and the total number of cars made in Canada has tumbled over time, he said. Similarly, the U.S. can't supply its own aluminum needs and is already signaling it will ease tariffs on Canada, he said.
Failing such compromises, another way to resist is signing more defense contracts with European suppliers instead of American firms, Karaguesian said. Carney says the U.S. used to get about four out of every five dollars of that work, and that era is ending as relations become less stable.
“This is a ruthless Great Power, and the way you deal with it, you fight back,” Karaguesian said. "He actually is prepared to walk away from a bad deal, and he’s prepared to have no deal over a bad deal.”
Jul-23 16:09
The European Central Bank held its key interest rates on Thursday and opened the door to a hike in September, as new tensions in the Middle East push up energy prices again.
While ECB President Christine Lagarde described the decision to hold rates as having been “unanimous,” she added that some Governing Council members had raised the possibility of following up June’s 25-basis-point hike with another increase at this meeting before agreeing to leave the Deposit Rate at 2.25%.
"It was a unanimous decision, but I'm going to qualify that because there were some governors who asked themselves, whether we should not consider a hike, in other words, raising the three interest rates on the occasion of that meeting," Lagarde told a news conference, adding that the ECB will closely look at data before deciding on its policy action at its September meeting. (See MNI SOURCES: Gulf Flare-Up Reinforces ECB September Hike Case )
In response to a question from MNI, Lagarde said the ECB’s reaction function is “very well understood by markets,” which currently price in two additional 25-basis-point hikes by the end of the year.
“The fact that it has been well articulated, that it's concise in its expression, that it can be understood, I hope, by all, but certainly by markets, I think, is a factor of stability in this very, very uncertain landscape in which we are trying to navigate ... so I really think that it is it is well understood," she said.
In a statement, the ECB said "uncertainty remains high and the full inflationary impact of the energy shock has yet to play out."
Inflation risks are now less balanced following the breakdown of the Middle East ceasefire, returning the ECB to a similar situation to that in which it found itself in June, Lagarde said.
LAGARDE IN JOB AT LEAST UNTIL 2027
Lagarde also said that she would remain in office until at least 2027, though refrained from confirming that she would fully serve out a term only due to end in October of that year.
"You are not going to see the back of me before 2027," she said. "When there are clouds on the horizon, the captain stays on the ship, and this captain is staying on this ship as long as there are clouds on the horizon.”
While there are no confirmed candidates to replace her, former Bank of Spain Governor Pablo Hernandez de Cos and former Dutch central bank chief Klaas Knot are said to be among the leading contenders. (See MNI: Spain To Support De Cos For ECB Head After Initial Doubts)
Jul-23 15:25
UK government spending plans lacked credibility even before Andy Burnham's promised policies, putting the new prime minister "firmly back in the box" that had constrained his predecessor Keir Starmer given commitments to the same fiscal rules and tax pledges, a former Treasury official and deputy governor of the Bank of England told MNI.
"The spending plans are not realistic in the later years, so the headroom [against the government's fiscal rules] doesn't really exist," John Gieve said in an interview.
Official spending plans assume real-terms cuts to most departments in 2028-29 right before the next general election is scheduled, said Gieve, who left the BOE in 2009 after having earlier served at the Treasury and as permanent secretary to the Home Office.
"I don't think they are credible. I don't think anyone believes that's what's going to happen,” he said. "They've got to find the money either from cuts in welfare, or alternatively from tax increases, and none of the sort of capital tax ideas which they've raised seem to me likely to lead to big money, especially not in the short term.”
Welfare cuts provide "scope for making reasonably quick savings," but it is unclear "whether or not [the governing Labour] Party will wear it," after a rebellion over proposed cuts to disability payments helped erode former Prime Minister Keir Starmer's authority in summer 2025.
"The strategic choice is: do they give themselves enough headroom for three years? I mean, put some taxes up, which raise tens of billions. And if you're going to raise tens of billions, the way to do it is to put a small amount on everyone, and that's the value of the big taxes," he said.
Otherwise, there "won't be a significant change in fiscal policy ... borrowing as much as we think we can get away with by promising to be better tomorrow.”
TAX MANIFESTO COMMITMENTS
Labour committed not to raise VAT, income tax or National Insurance contributions at the last election.
Before taking office on Monday, "Burnham has said that he'll stick to the fiscal rules and he'll stick to the tax pledges ... he made that perfectly plain and it's on the record. But it seems to me that the first major statement by the new Chancellor [John Healey] is the last time he can probably change those pledges this Parliament," he added.
Alternative revenue sources to the broad-based taxes ruled out in the budget would only make a marginal impact.
Revaluing property values or bringing in a land tax would take years, so "there's no magic there,” Gieve said.
"There are other ideas that have been mentioned which could raise a bit of money, but ... that's necessary just to keep the show on the road as it is now, and I don't think they'll find very much headroom in the fiscal rules to make game-changing extra spending commitments."
ALTERNATIVE FUNDING SOURCES
Under the Public Sector Net Financial Liabilities (PSNFL) measure used for the debt-to-GDP target, official loans can be netted out on the state’s balance sheet against the public spending they finance, which has led to an expansion of named activities such as the British Business Bank, but Gieve doubted this could prove a panacea.
"The Business Bank, which is being much expanded anyway ... is a route that Reeves has already gone down, but there may be room to get them to invest and to hold the investments on their balance sheet and thus get an offset in terms of the debt constraint. I think they will do that, and I think that's fine," he said. (See MNI INTERVIEW: UK Fiscal Rules Allow Loan Lift - ex-OBR's King )
"If you go back to [using Public Finance Initiative], and they may go back to the PFI ... I think that will be something that they're looking at very seriously," he said, adding that these schemes would still leave the government with additional debts in future.
Gieve does not believe it would be prudent for the government to bet on higher growth.
"It's always possible that the world economy will take a turn for the better, and the British economy will take a turn for the better, so that actually things aren't as bad when you get there. But unfortunately, recent experience is things could be even worse when you actually get there, and ... I think it's a bad gamble."
Jul-23 12:36
China is likely to accelerate the implementation of support measures and prepare additional incremental policies to address weakness in traditional industries amid the economic transition and uncertainty in the external environment, a prominent Chinese economist told MNI.
The economy is showing significant structural divergence with new growth drivers such as AI and green industries expanding rapidly and boosting exports, investment and production, while traditional industries remain sluggish, contributing to persistent weakness in domestic demand, said Guan Tao, global chief economist at BOC International. (See MNI INTERVIEW: Further Yuan H2 Appreciation Uncertain – Guan)
Pointing to Q2’s 4.3% GDP growth, down from Q1’s 5%, Guan noted this suggested AI-led industries have yet to offset weakness in traditional sectors fully. The recent correction in AI-related asset prices also highlight the uncertainty surrounding the country's new growth drivers, he added.
Counter-cyclical policy support remains necessary, Guan said, predicting the Politburo meeting later this month will emphasise full implementation of existing measures while signalling readiness to deploy additional policy tools if needed.
Given the constraints on monetary policy posed by weak credit demand and compressed bank net interest margins, fiscal policy will need to play a greater role through both the composition and scale of government spending, he suggested. To support weak traditional industries, fiscal funds should be directed toward key areas such as government procurement, employment subsidies, vocational training and social welfare, which would stabilise employment, and boost investment, and consumption, Guan continued. (See MNI INTERVIEW: China Likely To Announce New Fiscal Stimulus）
K-SHAPE GROWTH
AI-related high-tech industries have become a major pillar of China's production and investment, reflecting the growth of the country's new engines, which is in line with China’s target of developing new quality productive forces, Guan said, citing H1 data from National Bureau of Statistics that showed new sectors, including high-tech and digital product manufacturing, contributed 47.9% to the growth of industrial value-added output, an increase of 12.0 percentage points.
In the first five months, profits in high-tech manufacturing grew by 44.7%, contributing 8.0 pp to the overall profit growth of industrial enterprises above designated size. At the same time, the AI industry has become a major driver of exports, increasing China’s reliance on the sector, he said.
According to Customs data, integrated circuits have been the largest contributor to export growth. Combined with automatic data-processing equipment and related components – including laptops, servers, motherboards and memory chips – they accounted for 50.5% of the increase in total exports during H1.
As trade expanded much faster than nominal GDP, China's trade dependence ratio – total imports and exports as a share of nominal GDP – rose to 35.45% in Q1, up 3.1 pp from a year earlier and the second-highest level since Q2 2015, he highlighted. On the other hand, industries with limited exposure to AI have benefited far less from the export boom, contributing to the widening gap between strong macroeconomic indicators and weaker conditions experienced by many businesses, Guan argued.
Traditional sectors are still facing strong supply and weak demand as the value-added industrial output grew by 5.4% year-on-year in H1, while retail sales increased by only 1.3% over the same period, widening the gap to 4.1 pp, compared with gaps of 2.3 and 2.2 pp in the previous two years, respectively. As a result, the capacity utilisation rate of industrial enterprises in the second quarter fell by 0.6 pp quarter-on-quarter to 73.0%, marking the third-lowest level on record, he warned.
Guan also believes further yuan appreciation in H2 remains highly uncertain.
Jul-23 07:09About
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