China’s economy is slowing to the lows seen way back in 1990 — a price President Xi Jinping seems willing to pay to reduce its dependence on the property sector.
Beijing’s squeeze on the real estate sector will linger into next year and beyond, a development many hadn’t seen coming that has now prompted banks like Goldman Sachs Group Inc., Nomura Holdings Inc. and Barclays Plc to cut their growth forecasts in 2022 to below 5%.
Bar last year’s pandemic year, that would be the weakest in more than three decades.
It’s a big stepdown from pre-pandemic rates closer to 7%. Given China’s status as the world’s second-biggest economy, it means softer demand for commodities pumped out by countries like Australia and Indonesia and slower spending by Chinese consumers who are crucial to multinationals from Apple Inc. to Volkswagen AG.
Economists are coming to realize that the Communist Party’s Politburo, the top decision-making body, was serious when it vowed this year not to use the property sector to stimulate the economy as they did following past downturns.
Officials say excess supply of housing is a threat to economic stability, and want investment to go to prioritized sectors like hi-tech manufacturing rather than more apartments.
“President Xi thinks the property sector is too big,” said Chen Long, an economist at Beijing-based consultancy Plenum. “Xi is personally involved in real estate policies, so ministries don’t dare to ease policies without his approval.”
Rob Subbaraman, Nomura’s chief economist, estimates China’s slowdown to 4.3% next year from 7.1% this year “can directly reduce world GDP growth by around 0.5 percentage points.” Beijing is willing to “sacrifice some short-term growth for greater long-term stability,” he said.
Covid Outbreaks
Weak consumer spending is another drag on the economy, with China’s zero tolerance to sporadic coronavirus outbreaks and stringent lockdown measures spooking consumers and forcing business to shut.
“In the case of longer-lasting zero Covid policy in China or a much deeper property downturn, GDP growth in 2022 could drop to 4%,” Tao Wang, chief China economist at UBS AG, said in a note.
China’s property sector is the biggest question mark over the economy because of its huge scale — more than 900 million square meters of apartments are constructed each year, official data show.
That investment, plus the output of related sectors like steel and cement production, accounts for anything between 20% and 25% of China’s GDP, economists estimate. Any slowdown — or an outright decline — in real estate development would leave a gap in the economy that expansion in no other sector could easily fill.
“China’s property slowdown is a major headwind to the global economy because it is likely to be the biggest headwind to the Chinese economy next year,” said Larry Hu, chief China economist at Macquarie Group Ltd.
China’s strict ‘zero COVID’ policy has dragged down consumer spending [FILE: Roman Pilipeyepa/EPA]
Real estate construction powered China’s V-shaped economic recovery from the pandemic, but the sector moved into contraction this summer after Beijing orchestrated a slowdown in mortgage lending that brought property developers such as China Evergrande Group close to bankruptcy.
The most spectacular decline has been in newly started housing projects, the steel-intensive part of real estate development, which fell more than 33% year-on-year in October, the biggest decline on record.
Property developers get most of their financing by selling homes to households before they are built. A pullback in mortgage lending, and a growing pessimism about the property market among households are causing sales to fall.
While the People’s Bank of China announced a slight uptick in mortgage lending in October, “the government is not rushing to stimulus even though starts have been collapsing,” said Rosealea Yao of Gavekal Dragonomics.
Beijing’s recent announcement of trials of a property tax to discourage the purchase of housing as an investment will damage sales sentiment further, she added.
As a result, multiple economists predict a 10% decline in new housing starts next year. But because Beijing is concerned about risks to social stability if developers are unable to complete pre-sold projects, officials will try to ensure existing projects are finished.
That means overall investment in real estate could grow next year even if sales and housing starts decline.
China’s housing sales and construction are expected to slow in 2022 [Qilai Shen/Bloomberg]
Morgan Stanley sees 2% growth in property investment next year, which would be down sharply from a pre-pandemic rate of 8%. Others, like UBS, are more pessimistic, predicting a 5% decline.
The slowdown could last for years: Goldman Sachs expects the housing sector to reduce GDP growth by 1 percentage-point annually each year through to 2025.
While Beijing has a lot of control over the housing market, it’s still possible the slowdown has self-reinforcing dynamics that could be hard for authorities to control, leading to an even sharper downturn than the more pessimistic forecasts.
For example, Chinese households tend to avoid property purchases when prices are falling, which can lead to lower sales and more price declines.
If Beijing is serious about resolving imbalances in the property market, it would require a “multi-year slowdown in construction activity, which will certainly slow the economy given the property sector’s weight,” said Logan Wright of Rhodium Group. “A lot still depends on what Beijing does in the next couple of months.”
OTTAWA – The federal government is expected to boost the minimum hourly wage that must be paid to temporary foreign workers in the high-wage stream as a way to encourage employers to hire more Canadian staff.
Under the current program’s high-wage labour market impact assessment (LMIA) stream, an employer must pay at least the median income in their province to qualify for a permit. A government official, who The Canadian Press is not naming because they are not authorized to speak publicly about the change, said Employment Minister Randy Boissonnault will announce Tuesday that the threshold will increase to 20 per cent above the provincial median hourly wage.
The change is scheduled to come into force on Nov. 8.
As with previous changes to the Temporary Foreign Worker program, the government’s goal is to encourage employers to hire more Canadian workers. The Liberal government has faced criticism for increasing the number of temporary residents allowed into Canada, which many have linked to housing shortages and a higher cost of living.
The program has also come under fire for allegations of mistreatment of workers.
A LMIA is required for an employer to hire a temporary foreign worker, and is used to demonstrate there aren’t enough Canadian workers to fill the positions they are filling.
In Ontario, the median hourly wage is $28.39 for the high-wage bracket, so once the change takes effect an employer will need to pay at least $34.07 per hour.
The government official estimates this change will affect up to 34,000 workers under the LMIA high-wage stream. Existing work permits will not be affected, but the official said the planned change will affect their renewals.
According to public data from Immigration, Refugees and Citizenship Canada, 183,820 temporary foreign worker permits became effective in 2023. That was up from 98,025 in 2019 — an 88 per cent increase.
The upcoming change is the latest in a series of moves to tighten eligibility rules in order to limit temporary residents, including international students and foreign workers. Those changes include imposing caps on the percentage of low-wage foreign workers in some sectors and ending permits in metropolitan areas with high unemployment rates.
Temporary foreign workers in the agriculture sector are not affected by past rule changes.
This report by The Canadian Press was first published Oct. 21, 2024.
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
