CHINA DATA: J.P. Morgan Maintains 2025 GDP Forecast
The global banks maintains its full year GDP forecast at just under 5%. It expects growth momentum to moderate towards the end of the year. It also still sees structural imbalances and deflation pressures. See below for more details.
J.P. Morgan: "The escalation in tariff war risks has posed the biggest challenge for the Chinese economy. Even after the tariff détente from the Geneva talks, the US average tariff rate on China is still 30%pts higher than the beginning of the year. We maintain our forecast of growth moderation, anticipating the net export lift to growth will fade away yet policymakers will refrain from launching additional stimulus beyond the policy guidance approved at March NPC.
Full-year growth forecast stays unchanged at 4.8%. The reason for the downward revision in 4Q is based on the assumptions that: 1) average tariff rates will stay unchanged; 2) fiscal policy will be front-loaded hence fiscal impulse will fade away in 4Q; and 3) the PBOC will continue to cut rates but the pace will be slow. In particular, we now expect only one more 10bp rate cut for the rest of the year (in 4Q) and postpone the other 10bp rate cut into 2026 (roughly the pace of 10bp cut every two quarters).
The major concern remains the structural imbalance and deflation pressure faced by the Chinese economy. GDP deflator has been negative for eight consecutive quarters (since 2Q23), and we do not anticipate it will end before the end of the year. Our forecast of nominal GDP growth is 3.8%, which means a negative GDP deflator at -1% in 2025 (vs -0.7% in 2024 and -0.5% in 2023). The government has taken actions to increase support for consumption, especially trade-in subsidy program for selected durable goods. Nonetheless, consumption package is still much smaller than investment package, and within consumption more can be done to liberalize the service sector (hence increase household income and boost service consumption) and improve the social safety network for disadvantaged groups (to reduce precautionary saving). The trade-in subsidy program has been effective, but the marginal impact may diminish and the temporary boost may face the payback of weaker future demand for durable goods."
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
RATINGS: Moody's Downgrades US's AAA Rating As Deficits Seen Ballooning
Moody's has downgraded the US's long-term credit rating to Aa1 trom Aaa. The move may not have been fully expected today. But it was the last holdout among they S&P and Fitch to demote the USA from the top rating, and they placed negative outlook on the US last year (now stable). Fiscal deterioration, both past and anticipated as Congress wrangles with the Republican fiscal bill, is cited as the key factor. From the release (link):
- “While we recognize the US’ significant economic and financial strengths, we believe these no longer fully counterbalance the decline in fiscal metrics."
- "This one-notch downgrade on our 21-notch rating scale reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns...We do not believe that material multi-year reductions in mandatory spending and deficits will result from current fiscal proposals under consideration."
- "If the 2017 Tax Cuts and Jobs Act is extended, which is our base case, it will add around $4 trillion to the federal fiscal primary (excluding interest payments) deficit over the next decade. As a result, we expect federal deficits to widen, reaching nearly 9% of GDP by 2035, up from 6.4% in 2024, driven mainly by increased interest payments on debt, rising entitlement spending, and relatively low revenue generation."
- "We anticipate that the federal debt burden will rise to about 134% of GDP by 2035, compared to 98% in 2024."
- "Federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021. The US general government interest burden, which takes into account federal, state and local debt, absorbed 12% of revenue in 2024, compared to 1.6% for Aaa-rated sovereigns."
US FISCAL: "Extraordinary Measures" Continue To Dwindle Amid Debt Impasse
The "extraordinary measures" available to Treasury to stave off a debt default were down to $82B as of May 14, per a Treasury Department release today.
- That compares unfavorably with a high of $335B in January when the debt limit impasse began. Combined with $562B in Treasury cash on hand, though, after April's large tax intakes, that makes for around $644B in available resources before the "x-date" is reached.
- Resources are gradually being eroded since reaching nearly $800B in mid-April.
- Per Tsy Sec Bessent's letter to Congress last week, "after reviewing receipts from the recent April tax filing season, there is a reasonable probability that the federal government's cash and extraordinary measures will be exhausted in August while Congress is scheduled to be in recess. Therefore, I respectfully urge Congress to increase or suspend the debt limit by mid-July, before its scheduled break, to protect the full faith and credit of the United States."
CANADA DATA: Sales Activity Points To Potential Marking Up Of GDP Ests
There was mixed news on the housing and wholesale/manufacturing sales fronts this week, which on net look to slightly upwardly bias Q1 GDP estimates, pending next week's retail sales reading.
Housing starts blew through expectations at 278.6k in April (226.2k expected, 214.2k prior). This came after building permits fell a worse-than-expected 4.1% M/M in March as reported Wednesday.
- Meanwhile, he Canadian Real Estate Association reported existing home says April sales unexpectedly contracted -0.1% M/M (+1.0% expected, -4.8% prior). Sales are now down 9.8% Y/Y, while prices fell 1.2% M/M (3.6% Y/Y on the price index). (Link)
- Overall, confidence appears subdued, which is likely to translate into subdued activity.
On the sales front, March data was soft but positive versus expectations and could add a slight upward drift to Q1 GDP expectations.
- Manufacturing sales were less negative than expected at -1.4% M/M (-1.9% expected/flash estimate, -0.2% prior rev up 0.4pp). The decline was led by primary metals -6.5%, an area hit by U.S. tariffs, and oil -4.2%. Overall Q1 factory sales grew +1.6% vs prior +1.1%.(Link)
- Wholesales ex-petroleum and grains rose 0.2% in March, vs the advance estimate / consensus -0.3%. Sales volumes fell 0.3%. Overall Q1 wholesales rose 2.5%, led by machinery/equipment and autos/parts.
