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Tag: inflation

  • Rising Inflation and the Risk of Recession

    Rising Inflation and the Risk of Recession

    While various stimulus packages got the global economy through the short-term challenges of COVID-19, they were always going to cause difficulties in the medium term. Inflation has risen and recessions look likely, so how can investors respond effectively?

    The global economic system appeared to cope with the COVID-19 pandemic and its associated lockdowns. Individual policymakers took different approaches to their economies, each of which had different impacts at a micro level and there were winners and losers throughout the process, but, broadly speaking, the wind kept filling the economic sails and countries kept moving forward.

    Inflationary Risk

    Keeping economies buoyant was economically and politically expedient in the short term, but it carried a significant medium-term inflationary risk. The complications created by the events in Ukraine have piled further pressure onto an already fragile structure and as we approach the final quarter of 2022, many countries face levels of inflation not seen since the 1990s.

    There is a very real threat of a global recession in 2023. Traditionally, economic policymakers have used interest rates to bring down inflation, raising them to make it more attractive to hold money in the bank or invest in government bonds rather than keep spending.

    Interest rates have been at historically low levels for the best part of a decade, so there is plenty of scope for them to rise and this is likely to have a significant impact on investment decisions.

    Why is Inflation Important?

    The aim of investment is to either create or preserve wealth, which means that during periods of high inflation, investors need to ensure that their portfolios work harder to stop value from being eroded. The challenge is that inflation impacts different asset classes in different ways.

    Inflation has been very tightly controlled in the developed markets over the last couple of decades, so there is relatively little experience of dealing with it in the markets. Understanding how individual asset classes have responded to periods of high inflation can offer a good gauge for what might be expected to happen during what is set to be a very challenging couple of years.

    How Should Investors React?

    At the same time though, even if it doesn’t evolve into a full-blown recession, smaller companies struggle with cash flow during a downturn no matter how innovative their idea and flexible their setup. In many ways though, it is in the difficult times that ideas are tested, teams are forged and world-beating companies are built.

    This makes investment during challenging times all the more important and can make the potential returns all the more tantalizing.

    Making losses More Manageable

    Most investors have experience with the 60/40 (equity/bond) portfolios but this asset allocation is struggling in 2022. As of August 2022, a balanced portfolio is down close to -15 percent in dollar. When the markets become challenging, it is no secret that diversifying an investment portfolio tends to help spread the risk and potentially make losses more manageable.

    Asset managers such as the team at Petiole Asset Management tend to have access and for many years expertise in a wide array of asset classes in the private markets which can give them a broader view of potential investment opportunities to improve the risk-return profile of their whole portfolio.

    Change, Flexibility and Transparency

    The investment space has obviously changed significantly over the last 15 years, with new digital tools that offer a level of transparency and of reporting that would have been inconceivable a generation ago. These tools enable investors of all sizes to be far more inventive and flexible in their approach to their private asset portfolios.

    In a lot of ways, investing is like sailing a yacht: with a little practice, most people can quite happily take a boat around a calm bay on a clear day with a light wind and get something positive from the experience. If conditions change though, the skies darken and the wind picks up, then the inexperienced can quickly find themselves in trouble.

    And it doesn’t take years of experience to see that going into the financial markets is likely to be very challenging for at least the next year.

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  • EU Looking to Lock Switzerland Out

    EU Looking to Lock Switzerland Out

    High inflation in the EU area and geopolitical uncertainties are some reasons why Europeans move assets to Switzerland. Yet as the country drifts further away from Brussels, going after these clients could become more complicated.

    Swiss banks are not allowed to proactively solicit clients in Europe unless they have a branch in the respective market.

    However, for many institutions, such as private banks and independent wealth managers, a second branch in Italy or France is, economically speaking, not worthwhile and does not fit with the business models of these institutions.

    The EU countries who have adopted this protectionist stance, do so in favor of their own banks. By contrast, Germany has made a special concession, allowing banks from third countries – such as Switzerland – a so-called exemption.

    The condition for this deal is that financial institutions adhere to certain regulations and are well supervised in their home country. It is precisely this special arrangement, of key importance to several Swiss private banks, that is under threat, as the Neue Zuercher Zeitung.

    The reason being that the EU wants to further harmonize its banking supervision. So far, only Europe’s large financial houses are monitored uniformly, while smaller houses are subject to national supervision; this explains the different practices in Germany and Italy, for example, with regard to banks from third countries.

    The EU project is now aimed at standardization, which would ban special regulations for individual countries. The driving force behind this development is France, which is primarily against the predominance of Anglo-Saxon banks on its own turf.

    Although Switzerland plays only a secondary role in the French market, if such a procedure is rolled out in other countries, it would be a harsh verdict for many Swiss private banks.

    After all, business with German clients is still lucrative and growing strongly. Estimates by the international consulting firm Boston Consulting Group (BCG) suggest that clients from the EU region and Great Britain have a good 1,000 billion Swiss francs managed by Swiss financial institutions, which employs 20,000 people at local banks and generates tax revenues of around 1.5 billion francs, as the Swiss Bankers Association (SBA) recently calculated.

    The prospect of Switzerland obtaining an exclusive arrangement with the EU is also unlikely. Ultimately, any agreement depends on political willingness within the EU and after Switzerland broke off its discussions to forge an over-arching treaty the EU last year, this willingness is not great.

    Although Germany, Spain and Holland were successful in getting France to omit article 21c – which is responsible for stifling foreign banks – from the plan, observers agree that sooner or later the Paris-based European Banking Authority will bring it back to the agenda.

  • Gasoline pushes May inflation to 2.86 pct

    Gasoline pushes May inflation to 2.86 pct

    A surge in the prices of gasoline, food and some other goods has sent the consumer price index rising by 2.86 percent year-on-year in May.

    Global gasoline prices went up while the rising costs of raw materials and ingredients pushed up food prices, according to the General Statistics Office.

    The monthly rise in prices was 0.38 percent with culture, tourism and entertainment products rising by 0.74 percent as travel demand recovered.

    Inflation in the first five months was 2.25 percent as against 1.29 percent in the same period last year.

    Standard Chartered Bank expects full-year inflation of 4.2 percent in 2022 and 5.5 percent in 2023.

    Several economists have also said it would be difficult to contain inflation below the targeted 4 percent rate due to higher prices, especially of gasoline, caused by war in Ukraine.

    Inflation was 1.8 percent last year, the lowest in six years.

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  • Rabobank sounds warning of food price inflation

    Rabobank sounds warning of food price inflation

    The current tremendous inflationary pressure on the cost base of virtually every food producer has yet to be absorbed further downstream in the supply chain. Will it be the consumer, the food retailer, or the foodservice operator that ultimately picks up the bill? Or will the problem be pushed back into the chain?

    Inflation in itself is not necessarily a bad thing, according to Rabobank’s chief macroeconomist – as long as everyone expects and calculates with the same inflation rate, that is. Well, the current cost inflation in food was definitely not modeled for and is unprecedented. Apart from maybe depreciation, virtually every cost line in the P&L is experiencing upward pressure. Whether it is agri commodities, packaging, transport, energy, or personnel costs, all have shown a massive price increase. And relief is nowhere in sight in the short term. Part of the cost increases even have a structural nature, as supply chains are shifting from ‘just in time’ to ‘just in case.’

    The exact magnitude of the cost inflation is difficult to gauge. Supplies are often covered by contracts, so the actual contracted prices and timing of contract renewals will differ from company to company. Moreover, the cost inflation a company experience depends on the type of products it produces, which raw materials are used, and where products are sourced. A bakery company will have more issues with the gas price, whereas a beer company will monitor glass and aluminum prices more closely, and a nut trader has to deal with the 822% price hike in container prices from Asia.

    So, rather than focusing on the cost itself, we have asked a broad range of suppliers throughout Europe how much they would have to raise their prices to food retailers and foodservice operators in order to cover their exploded cost base. The answers ranged from 0% up to 30% or more. On average, suppliers are looking for about 9% to 10% higher prices (PPI) toward retailers and foodservice companies to cope with the inflated costs. One thing is for sure, given the average operating margins in food production, not many producers will be able to absorb the cost inflation in their own operation. Many producers made it abundantly clear that subsidizing their products was not an option, so negotiations will be tough this autumn.

    Whatever You Do, Don’t Blink First

    The obvious next question is: What will food retailers do? Given the operational leverage in their business model, passing through any price inflation is in the best interest of supermarket organizations – in theory, that is. Food retailers across Europe are active in highly competitive markets. Being first to raise consumer prices would likely be detrimental to a retailer’s reputation and, if competition holds out long enough, also to sales volumes and market share. Also, the food retailer’s profit margin would not suffice to absorb a 10% higher cost of goods sold bill.

    It will be a matter of closely monitoring competition, timing any consumer price hikes carefully (preferably later than competitors), and weighing how much of the cost inflation can be absorbed without aggravating the stock market, shareholders, or co-op members. History provides ambivalent clues as to how supermarkets have dealt with previous inflation peaks.

    Looking back some 20 years, we have seen the cost base and producer prices in the EU-27 peak before, in 2007/08 and 2010/11. In the first cost rally, food retailers benefited from a favorable economic climate – just ahead of the financial crisis – and clearly decided to pass most of the inflation on to the consumer (CPI) with a limited delay. In 2010/11, the financial crisis and associated tax increases took a toll on consumers’ wallets, and, consequently, food retailers were much more cautious in how much and when they raised the prices on their shelves. Whether the economic climate in today’s market reflects 2007/08 more or the broader inflation experienced outside food more closely resembles the 2010/11 consumer is the million dollar question.

    In order to calculate an index representing the cost inflation of food producers, we have constructed a cost base of a nonexistent, average food company that uses the FAO food stuff index as agricultural raw materials (40% of costs), the Eurostat energy index representing transport, production, and packaging (30% of costs), and the Eurostat labor cost index for all staff-related costs in production, sales, marketing and, administration (30% of costs).

    The Worst Is Yet to Come for the Consumer

    Given that neither the food producer nor the food retailer are able or willing to absorb the cost price inflation in full, the consumer will likely be confronted with higher grocery prices sometime in the early months of 2022, though not necessarily in one go. Food retailers may choose to raise consumer prices in phases in order not to upset the consumer too much.

    The good news for most consumers is that they have means to circumvent that inflation in their budgets by trading down to cheaper products or cheaper channels: buying ground beef instead of steaks, opting for private label products instead of brands, shopping at hard discount instead of full-service supermarkets, or having dinner in a QSR outlet rather than a fast-casual restaurant.

    To make it more complicated, this trading down by the consumer may trigger substantial volume shifts in demand, which both food producers and food retailers will need to factor into their decisions on how to deal with the unprecedented inflationary pressure.

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  • Inflation rate lowest in five years

    Inflation rate lowest in five years

    Vietnam’s inflation rate in the first 10 months was 1.81 percent, the lowest since 2016.

    In October alone, inflation fell 0.2 percent from September, as lifted restrictions in localities help boost goods transport and reduce stockpiling demand, General Statistics Office reported.

    Demand for electricity and water also fell as the country transitioned from summer to fall while decreasing rents also contributed to lower inflation, it added.

    Gold prices fell 0.21 percent from September as global rates dropped.

    Vietnam targets to keep inflation rise under 4 percent this year.

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  • Inflation in Vietnam likely to be below 3 pct this year

    Inflation in Vietnam likely to be below 3 pct this year

    Inflation this year is likely to be 2.5-3 percent, well below the target of 4 percent set by the National Assembly, due to low consumer demand, analysts said.

    Global prices of strategic materials are likely to climb in the next few months due to geopolitical tensions and Covid-19, but food and foodstuff prices in Vietnam are expected to remain stable due to strong supply and weak demand, the Ministry of Finance’s price management department said at a seminar on the price and market situation on Friday.

    The consumer price index (CPI) was up 1.47 percent year-on-year in the first half of the year, its slowest rise since 2016, according to the General Statistics Office.

    The prices of some foodstuffs like pork and chicken fell, while those of petrol and commodities rose sharply.

    Nguyen Ba Minh, head of the Institute of Economics and Finance, said the CPI would rise by some 2.5 percent this year.

    Le Quoc Phuong, former deputy director of the Vietnam Trade and Industry Information Center, too expected inflation to be below 3 percent.

    Dinh Trong Thinh, an economist at the institute, said if the Covid-19 situation worsens, and Vietnam’s economy grows at 6.8-7 percent in the second half of this year, inflation would be 3.3-3.5 percent.

    If the economy grows at 7-7.4 percent, the inflation would be 3.8-4 percent, he said.

    The government expects growth of 6-6.5 percent in the second half this year depending on the Covid situation.

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  • Vietnam inflation climbs to 7-year peak in January

    Vietnam inflation climbs to 7-year peak in January

    The consumer price index (CPI) in January jumped 6.43 percent year-on-year, the biggest increase seen in 7 years.

    It also rose 1.23 percent over last December, with the high increase this year attributed to the surge in eating out, shopping and travel demands of people during Tet or the Lunar New Year, Vietnam’s biggest national holiday.

    The General Statistics Office (GSO) said that in the CPI basket, 10 major groups of consumer goods and services saw their price indices rise in January, led by food and catering services with a 2.29 percent increase.

    It was followed by housing and construction materials costs, up 1.47 percent; transportation, 0.69 percent; beverages and tobacco 0.65 percent; and garments and footwear, 0.33 percent. Meanwhile, post and telecommunications decreased slightly by 0.03 percent.

    The government has targeted keeping CPI below 4 percent in 2020 this year, the same as the last three years, but GSO head Nguyen Bich Lam has warned that this may be difficult to achieve, given impacts of the African swine fever epidemic, which wiped out 6 million pigs last year, forecast to remain a major challenge.

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  • India’s January retail inflation more than halved to 2.05 pc

    India’s January retail inflation more than halved to 2.05 pc

    India’s annual rate of retail inflation more than halved to 2.05 percent in January from a high of 5.07 percent during the corresponding period last year, official data showed on Tuesday. The downward trend in CPI, is due to food inflation which has further widened its negative trend. Fruits, vegetables and eggs continued to witness deflationary trend during January this year, with their prices declining 4.18 percent, 13.32 percent and 2.44 percent, respectively, according to the data.

    Industrial production jumped to 2.4 percent in December, 2018 from 0.5 percent in November, 2018 driven mainly by a sharp spike in manufacturing index which rose to 2.7 percent vs -0.4 percent month-on-month.

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  • Malaysia to post 4.4% GDP growth for Q4 2018: StanChart

    Malaysia to post 4.4% GDP growth for Q4 2018: StanChart

    Standard Chartered has projected Malaysia’s gross domestic product (GDP) to remain at 4.4% in the fourth quarter (Q4) of 2018. However, full-year GDP is expected to come in lower at 4.6% compared with 5.9% in 2017. Bank Negara Malaysia will release Q4 GDP data on Thursday.

    “We estimate GDP growth of 4.4% y/y, similar to Q3. Private consumption may have eased from the 9% y/y growth in Q3 as the boost from the tax holiday in June-August 2018 likely faded. Nevertheless, a rebound in mining and agriculture activity may have supported growth,“ Standard Chartered said in a research note.

    It added that private consumption was the main growth driver in 2018, accounting for 92% of GDP growth in the nine months (9M) of 2018 versus 64% for the same period of 2017, benefiting from the “tax-holiday” boost and strong labour market conditions.

    Meanwhile, private investment eased (primarily on lower investment in residential and commercial properties in the first quarter) and public investment extended its decline in 9M 2018.

    “Our GDP growth tracker suggests downside risk to our Q4 GDP growth forecast, with our tracker being reliant on more readily available externally driven activity data, such as IP, and less reflective of strong domestic consumption,” it said.

    Standard Chartered forecast 4.9% GDP growth for 2019, saying that private consumption is likely to remain the main growth pillar.

    “Beyond the consumer sector, we are slightly cautious on growth, especially given weak external demand. However, we see two one-off supportive factors. First, goods and services tax (GST) and income tax refunds amounting to RM37 billion (2.5% of GDP) may support spending (but these refunds have not been disbursed yet, posing downside risk to our growth forecast). Second, resumption of production capacity in the mining sector may also help.”

    On monetary policy, Standard Chartered said the latest meeting of Bank Negara Malaysia’s Monetary Policy Committee in January suggested that it is more dovish on the global outlook but still comfortable on domestic growth, underpinned by private consumption and private investment.

    “We maintain our call for Bank Negara Malaysia to keep rates on hold in 2019, with risks skewed towards a cut, especially if external demand worsens further and affects domestic activity.”

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  • RAM Malaysia lowers inflation forecast for 2019 to 2%

    RAM Malaysia lowers inflation forecast for 2019 to 2%

    RAM Ratings, which expects inflation to inch up to 0.3% in December 2018 from 0.2% in the previous month, has revised its full-year headline inflation forecast for 2019 to 2.0% from 2.7%. The rating agency said in a statement that inflation in December 2018 is estimated to rise to 0.3% from 0.2% in the preceding month due to dissipation of deflationary pressures from the transport fuel component.

    The price of RON95 petrol fell 3.3% year on year in December, after a 4.5% drop in November.

    On that note, overall inflation is envisaged to come in at 1.0% in 2018.

    As for 2019, RAM Ratings has revised its headline inflation projection downwards to 2.0%, mainly due to changing expectations on global oil prices, which are increasingly pointing to a lower average range of US$60-US$65 (RM248-RM269) per barrel for 2019.

    RAM head of research Kristina Fong said the rating firm’s sensitivity analysis indicates that for every US$5/barrel move in the price of Brent crude, headline inflation potentially changes 0.3 percentage point.

    “The move back to the weekly Automated Pricing Mechanism for pump prices – effective January 2019 – is not expected to exert any significant downward pressure on inflation given the short period it will be in place ahead of the anticipated targeted fuel subsidy mechanism to be implemented in second quarter 2019.

    “Moreover, global oil prices are expected to trend a little higher compared to the start of the year, An escalation in oil (petrol) prices beyond RM2.20/litre will trigger the use of subsidies to maintain this ceiling. This will also contain inflationary pressure,” she added.

    The Department of Statistics released the December inflation data yesterday.

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  • Indonesia December Inflation Cools, Stays Within Bank Indonesia Target

    Indonesia December Inflation Cools, Stays Within Bank Indonesia Target

    Indonesia’s December annual inflation rate eased, but the pace was quicker than expected, data from the Central Statistics Agency, or BPS, showed on Wednesday. The annual inflation rate in December was 3.13 percent, the agency said, lower than November’s 3.23 percent, but quicker than the median forecast of 2.98 percent. The December rate was well within Bank Indonesia’s target range of 2.5 percent to 4.5 percent for 2018.

    On a monthly basis, the consumer price index rose 0.62 percent due to rising food prices and transportation fares.

    The annual core inflation rate, which excludes government-controlled and volatile prices, was 3.07 percent, matching the poll’s prediction and representing a slight acceleration from November’s 3.03 percent.

    The central bank raised interest rates six times last year to defend the rupiah, which hit its lowest in 20 years in October. However, the currency pared some losses closer to the end of the year due to capital inflows

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  • Vietnam to top 7 pct growth in 2018 and 2019

    Vietnam to top 7 pct growth in 2018 and 2019

    Vietnam may grow more than 7 percent in 2018, the highest in 10 years, and is likely to maintain the rate next year, experts say. Nguyen Xuan Thanh, director of development, and public policy lecturer at the Fulbright University of Vietnam, said the country’s economy is expected to grow at over 7 percent this year, the highest level since 2007.

    “The major contributor of growth comes from industries that benefit from policies to replace import goods, such as automobile and pharmaceutical production,” he said at a conference organized Thursday by the National Financial Supervisory Commission (NFSC).

    In 2017, Vietnam rode on 20-30 percent growth of phones and electronics, but this year, that sector’s growth slowed down to only 11 percent in the first 11 months of 2018, Thanh explained.

    He also noted that a positive aspect of the growth this year has been that it is no longer dependent on credit. The NFSC estimates credit growth to have slowed significantly to 15 percent this year from 18 percent in 2017.

    “Many experts were concerned that Vietnam’s high growth rate in previous years was linked to credit growth, but there has been strong economic growth this year without high credit growth,” Thanh said.

    Meanwhile, NFSC leaders said Vietnam’s growth may exceed 7 percent in 2018 and remain at between 6.9-7.1 percent in 2019.

    Truong Van Phuoc, acting chairman of the NFSC, said the high growth in 2018 is due to large contributions from the private sector. In addition, trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA), which are expected to come into effect in 2019, may also bring positive impacts.

    Vietnam also has the opportunity to attract investment as well as new opportunities from the field of information technology and biotechnology, he added.

    But experts also point out some factors that could affect economic growth next year. Thanh noted that growth this year was not only due to investment and export but also the heavy consumption.

    Any changes to consumption can have immediate effect on economic growth, he said.

    In the first nine months this year, Vietnam’s GDP grew by 6.98 percent, the highest nine-month growth rate since 2011. The economy grew by 6.81 percent last year, the highest rate in a decade.

  • November inflation seen easing to 0.5%

    November inflation seen easing to 0.5%

    Malaysia’s consumer price index (CPI) is expected to rise 0.5% in November from a year earlier, a Reuters poll showed, marginally slower than the previous month amid lower transport prices. Inflation has been mild since the government removed an unpopular consumption tax in June and reinstated a narrower sales and services tax (SST) three months later.

    The annual inflation rate was 0.6% in October. It has been rising after hitting a three-and-a-half year low of 0.2% in August.

    Economists expect any pickup in inflation due to the reintroduction of SST to be muted, softened further by the government’s decision to fix pump prices for premium RON95 petrol for the rest of the year.

    Last month, Malaysia’s central bank said inflation had been largely benign in the third quarter, but was expected to edge upwards the rest of the year and into 2019.

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  • Indonesia’s November Inflation Rate Surprisingly Picks Up

    Indonesia’s November Inflation Rate Surprisingly Picks Up

    Indonesia’s annual inflation rate accelerated for a second straight month in November, the statistics office said on Monday, against an expectation for price pressures to ease. The consumer price index rose 3.23 percent in November from a year earlier, Central Statistics Agency (BPS) chief Suhariyanto said, attributing the increase to rising prices of some food products and airfares. On a monthly basis, it rose 0.27 percent.

    October’s rate was 3.16 percent, while a Reuters poll had expected a November annual inflation rate of 3.15 percent.

    The November rate was still well within the central bank’s target range of 2.5 percent to 4.5 percent for 2018.

    The annual core inflation rate, which excludes government-controlled and volatile prices, also picked up more than expected in November to 3.03 percent, from 2.94 percent in October. The poll had expected a core inflation rate of 2.97 percent.

    Bank Indonesia has hiked interest rates six times this year by a total of 175 basis points since May to support the rupiah, despite benign inflation. The currency plumbed levels not seen since 1998 earlier this year but has sharply strengthened last month due to improving global investor sentiment.

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  • Why is the Chinese economy slowing down?

    Why is the Chinese economy slowing down?

    China’s economy appears to be slowing faster than expected at the start of the fourth quarter, a bad omen for growth early next year when the full force of the trade war with the United States comes to bear. This situation is likely to spur Beijing to introduce new measures to support growth, analysts said.

    The government will try to avoid returning to its battle-tested plan of large-scale monetary and fiscal stimulus so as not to exacerbate the country’s already huge stock of debt, but it may have no choice but to move some way in that direction to stabilize growth.

    Business sentiment in both the manufacturing and non-manufacturing sectors was weaker than expected in October, led by sharp declines in export demand, according to the official purchasing managers’ index published on Wednesday by the National Bureau of Statistics and the China Federation of Logistics and Purchasing.

    The figures were the first gauges of the trade war’s impact since the U.S. levied 10 percent tariffs on $200 billion worth of Chinese goods in late September.

    The manufacturing sentiment index dropped to 50.2 in October, from 50.8 a month earlier.

    The reading, which was its lowest in more than two years and barely above the 50 point line that separates expansion from contraction in the sector, suggests the possibility of contraction in November as the U.S. tariffs take effect.

    That situation could worsen in January, when the tariff on the $200 billion of Chinese imports is set to rise to 25 percent.

    It might also be exacerbated by the “front loading” behavior of many Chinese exporters — boosting production and shipments now to fill orders for early next year before the scheduled tariff rate increase.

    Production and unemployment among export manufacturers are at risk of falling sharply from January due to lack of orders to fill.

    New export orders contracted for the fifth month in a row in October, to 46.9 from 48 in September.

    Imports also contracted for a fourth straight month, indicating weakening demand within China, while the decline in manufacturing employment accelerated.

    Non-manufacturing activity, dominated by the service sector, also slowed in October, with the index dropping a full point to 53.9.

    While the index still indicates a healthy level of activity, the size of the drop could be a sign of a sharp slowdown ahead.

    Indeed, the contraction in service sector export orders seen in September accelerated sharply in October, falling a further two points to 47.8.

    The October data also reinforce the picture that small- and medium-sized companies are struggling, with indices for both groups falling further into contraction.

    In contract, the index for large companies fell but remained in positive territory.

    “The economic conditions facing China’s private sector are much worse than the headline figure suggests, in our view,” analysts at ANZ said in a report. “The October PMIs for mid-sized and smaller sized companies fell to 47.7 and 49.8, respectively.”

    “So we expect the Caixin PMI to have already fallen into the contractionary zone,” the report said.

    The Caixin PMI data better reflects sentiment in smaller, usually private sector firms.

    Analysts said that a faster than expected economic slowdown this year could be compounded early next year by a lack of new orders and higher U.S. tariffs, prompting further action by the government to prop up growth.

    “We expect a worse growth slowdown in spring 2019 for several reasons [especially after export front loading],” said Ting Lu, chief China economist at Nomura Global Market Research.

    “Beijing’s policy focus so far has been on containing a credit freeze. If our more cautious views prove to be valid, growth is likely to slow to such a worrying pace in spring 2019 that Beijing may have to greatly ramp-up its easing/stimulus measures.”

    The economic forecasts do not take into account the possibility of a large escalation of the trade war.

    U.S. President Donald Trump said again on Monday that tariffs on an additional $267 billion worth of Chinese imports — which would equate to sanctions on virtually all Chinese goods — were “ready to go” if there was no trade progress.

    He said he expected the trade war to result in a “great deal” for the U.S., but did not say how and when that would happen.

    Analysts warned that while the direct impact of U.S. tariffs on the Chinese economy is limited, the negative impact on business and consumer sentiment, and so on the economic outlook, could be much larger.

    Steven Cochrane, the chief Asia-Pacific economist with Moody’s Analytics, said in an interview that additional tariffs would have an outsize impact.

    “There would be much more uncertainty that would tend to slow the pace of investment and consumption,” he said.

    “Consumers are [already] feeling uncertain about next year, so they are going to pull back.”

    In retaliation, China might implement qualitative measures, such as more aggressive inspections of imports from the U.S., creating stiffer visa requirements for visiting American workers, slowing regulatory approval for U.S. companies operating in China or targeting service imports from the U.S., including restricting the enrollment of Chinese students at American universities.

    In a research note released last week, Cochrane estimated that if a 25 percent tariff were imposed on all China-U.S. trade and Beijing applied qualitative countermeasures, China’s gross domestic product growth would fall by 1.2 percentage points to 5.2 percent in 2019 and the Chinese stock market would fall by 9.4 percent.

    The U.S. is reportedly preparing to impose the next round of tariffs on the $267 billion in Chinese goods in early December if Trump’s scheduled meeting with Chinese President Xi Jinping at the G-20 summit in late November produces no progress.

    If true, and given the 60-day comments period that would start when the tariffs are announced, this would mean that the new tariffs would be implemented in early to mid-February, during or just after Lunar New Year.

    Like Christmas in the West, the celebration is the largest instance of consumer spending during the year, so any fall in sentiment caused by the introduction of the new tariffs could have a very negative effect on China’s economy.

    Business sentiment in both the manufacturing and non-manufacturing sectors was weaker than expected in October, led by sharp declines in export demand, according to the official purchasing managers’ index.

    The figures were the first gauges of the trade war’s impact since the U.S. levied 10 percent tariffs on $200 billion worth of Chinese goods in late September.

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