Global Economic Outlook: China's Growth Strategy and US Policy Challenges

China's economy is set to maintain its growth trajectory, driven by a focus on expanding domestic demand and strengthening household consumption, despite challenges from negative inflation and external trade imbalances. Meanwhile, the United States faces a critical Supreme Court decision on the legality of Trump-era trade tariffs and navigates the severe economic and social impacts of its longest-ever government shutdown.

Key Points Summary

• China's Economic Growth and Strategy

  China's economy is projected to maintain its current growth trajectory, positioning the country as an attractive market for global companies, while Beijing actively addresses concerns regarding trade imbalances. Its GDP is anticipated to surpass 170 trillion yuan (approximately $24 trillion) within the next five years, indicating an average annual growth rate of about 4% until 2030, without accounting for price changes. The government is concentrating on expanding domestic demand, specifically by strengthening household consumption, to fully unlock its market potential. China faces negative inflation, which deters consumer spending, burdens debts, reduces corporate profit margins through price wars, and initiates a vicious cycle of decreased spending and investment. Beijing has implemented measures, termed 'anti-involution,' to curb destructive price competition in sectors like electric vehicles and food delivery, aiming to restore profitability, facilitate wage growth, and boost domestic consumption. The appeal of China's consumer market also hinges on economic conditions in the United States and Europe, which have historically raised complaints about China's imbalanced trade practices and increased protectionism. Economists highlight the persistent weakness in household consumption, advocating for an increased share of consumption in the economy in the coming decades. A recent agreement between China and the US has fostered warmer relations and reduced tensions, potentially improving conditions for China's external consumption. China's new five-year plan aims to develop a demand-driven model, significantly increasing the share of consumption in economic growth, enhancing public service spending, and creating more jobs; this approach, while stimulating domestic demand, faces international challenges from other countries reacting to an influx of inexpensive Chinese goods.

• US Trade Tariffs and Supreme Court Decision

  The US Supreme Court is currently reviewing the legality of tariffs imposed by former President Trump, with lower courts having previously declared these tariffs unlawful due to an alleged overreach of emergency powers. The tariffs in question include general low-level tariffs, reciprocal tariffs ranging from 10% to 41% on goods from countries without trade protection agreements, and additional tariffs on imports from Mexico, China, and Canada, initially justified by Trump for the fentanyl crisis. A Commerce Department investigation concluded that the targeted imports posed a threat to national security, a basis Trump used to invoke the International Emergency Economic Powers Act (IEEPA). The core legal debate centers on Article I of the US Constitution, which grants Congress the authority to levy taxes and tariffs and regulate foreign commerce; while Congress has historically delegated some of this power to the President with specified limitations, Trump asserted 'unlimited power' under the IEEPA. The IEEPA, enacted in 1977, allows the President to control international financial transactions during emergencies, typically through sanctions, but it does not explicitly refer to tariffs and had not been previously used for such purposes. Lower courts deemed Trump's executive orders for global tariffs illegal, ruling that the IEEPA does not grant the President unlimited tariff-setting powers, thereby returning the decision to the Supreme Court. A widespread repeal of these tariffs would result in lost government revenue, potential demands for repayments, and increased concerns about the US government's financial stability, particularly affecting the bond market. Even if these specific tariffs are repealed, the Trump administration could still pursue other legal avenues for imposing tariffs, such as through Section 232 national security authority, although with a more limited scope.

• US Government Shutdown Crisis

  The US government is experiencing its longest shutdown in history, entering its 36th day due to unresolved disputes over budget allocations, healthcare spending, and financial priorities, leading to a severe operational crisis. The economic impact is deepening, with a previous shutdown under Trump costing 0.1% of GDP, and current fiscal pressures straining the government. Essential personnel, including active military and air traffic controllers, are working without pay during one of the busiest travel periods, leading to increasing absenteeism. The Department of Labor has ceased collecting vital employment and price data, leaving policymakers, including the Federal Reserve, with incomplete information for decision-making. Economists warn that an eight-week shutdown could reduce fourth-quarter economic growth by up to 2%, resulting in billions of dollars in lost economic output. Approximately 600,000 federal employees are working without pay, and 650,000 are on mandatory leave, potentially pushing the unemployment rate up to 4% (from a previous 4.3% before data collection stopped). The shutdown has contributed to Republican defeats in recent gubernatorial elections in New Jersey, Virginia, and New York, with Trump attributing these losses to Washington's political divisions. Critical public services are severely affected; the CDC has halted weekly reports on influenza and COVID-19 during peak respiratory season, student aid applications are delayed, tax returns are pending, and new drug approvals are on hold. The shutdown is causing widespread disruptions in air travel, with thousands of flights delayed or canceled daily, mirroring patterns from previous shutdowns. A judicial assistance program designed to support vulnerable Americans faces jeopardy, with only half of its intended payments currently possible. Public opinion regarding blame for the shutdown remains divided, with 45% attributing fault to Republicans and 33% to Democrats, reflecting historical patterns of similar crises. Both major parties remain entrenched in their positions, suggesting that the shutdown's resolution will likely require significant public pressure or extraordinary legislative action from the Senate. Democrats, emboldened by recent electoral victories, are maintaining their stance on budget priorities, particularly concerning ObamaCare and Medicare, and are linking healthcare cost reduction to reopening the government. Further discussions are scheduled between Republican senators and the White House to address the ongoing shutdown.

• Key Economic Data for the Day

  The ADP employment change data and the ISM Services PMI from the ISM institute are highlighted as significant economic indicators to watch for market attention.

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