Looking into the future macroeconomic trend, there is a possibility of a new round of global economic recession. The extent of the recession may exceed the previous round of subprime mortgage crisis, which triggered the country’s monetary easing to exceed expectations, triggering China’s countercyclical adjustment to exceed expectations. The above three “beyond expectations” are bound to have a major impact on the steel market.
1. The extent of the new round of economic recession may exceed expectations.
For a period of time, mainly because the United States Trump arbitrarily provoked the impact of trade wars, the world’s major institutions have lowered their economic growth expectations, there are still many views that the US economy will enter a recession in 2020, so the global manufacturing index is sluggish, international trade Slowdown, stock market prices have fallen sharply, investment prospects are bleak, and US long- and short-term bond yields are upside down. There are indications that a new round of world economic recession is likely to come.
Not only that, if a new round of economic recession breaks out, then the “time point” of its outbreak is very bad, which will make the new round of economic recession and length exceed expectations. This is because: after the last round of economic crisis, the countries of the world have shown a rare “unity” and reached a “consensus” that does not engage in trade protectionism and currency devaluation, and has started to stimulate domestic demand, especially in the United States. The easing of extreme amounts of money and China’s “four trillion” stimulus measures have pushed the global economy to rebound.
The eve of the economic downturn was at a time when the trade war provoked by the Trump administration in the United States became more and more fierce. The current consensus on not protecting trade protection and currency devaluation has been broken, especially the US government, naked neighbors, the US interests first, unscrupulous extreme trade protectionism, and the manipulation of the exchange rate to push the dollar to depreciate, which is bound to trigger a rebound in various countries. In this context, not only will the global economy be pushed to the economic recession, but it will also increase the extent of its economic recession and the recession. US Federal Reserve Chairman Powell warned not long ago that US trade policy uncertainty is causing problems such as a global economic slowdown, weak US manufacturing and capital spending. Therefore, the extent and length of this recession may exceed the previous one.
If a more serious new round of global economic recession comes as expected, it will inevitably make the external environment of China’s steel market even more severe, especially after the US Trump administration imposed tariffs on most US exports on September 1. Statistics show that in the first seven months of this year, due to the negative impact of the trade war, China’s steel exports fell by 2.9% year-on-year, and the growth rate of mechanical and electrical products’ exports increased by 8.5 percentage points over the same period last year. It can be predicted that China’s steel exports during the downturn, including its direct exports and indirect exports, will come on September 1 after Trump imposes high tariffs on most Chinese exports to the United States. Affected by this, China’s steel market will be suppressed by external demand in a short period of time. The fall in the current steel market should be the reaction and digestion of this kind of impact.
Second, the monetary easing of countries may exceed expectations
Due to the extremely serious trade protectionism, in the face of the resulting economic recession, governments around the world, especially the US government, have no choice but to loosen the way out. For example, when Trump of the United States imposes high tariffs on most Chinese exports to the United States, his “trade war ammunition” is not much left. What will happen? After all, in the retrospective tax increase, for Trump, it is a difficult “hard bone”, many of which are related to the “national economy and people’s livelihood” of the United States, which is related to the direct interests of the average American consumer. As for the so-called “American madness” that orders US companies to withdraw from China, it is even more difficult to achieve in a short period of time. This makes it easy for us to understand why Trump is so irritated and even threatened with “hot war.”
In terms of more accommodative monetary policies in the world, the European Central Bank has already indicated that it will cut interest rates, and will implement a more aggressive asset purchase plan in September, which is to increase the loosening of the money. The Japanese government also said that it will maintain a loose monetary policy. The Fed is expected to cut interest rates twice in the September and October meeting of interest rates, each with 25 basis points, and may even cut interest rates by 50 basis points in September. Other central banks have already cut interest rates and are expected to cut interest rates further. If the global economy, especially the US economy, officially enters a recession in 2020, or to avoid such a bad situation, it will surely trigger the tide of interest rate cuts and banknotes of central banks around the world, even to an unprecedented degree. It can be seen that the monetary easing may be larger than expected, and even exceed the last round of financial turmoil. In this regard, steel market participants must also be mentally prepared.
The global resumption of loose monetary policy is conducive to economic growth, but it will also generate future asset and commodity price bubbles. Of course, it also includes black series commodity prices and stock market asset price bubbles. This is inevitable, and it is necessary to cope with and avoid economic recession. The necessary cost. This effect is expected to appear in the three months to half a year after the implementation of the monetary easing policy, in which the impact on the spot market is delayed, and the impact on the futures market is earlier. In the medium term, the steel market will show a trend of first and foremost.
Third, China’s countercyclical adjustment may exceed expectations
Faced with the global economic recession that may exceed expectations, in the face of Trump’s extreme pressure, in the face of more severe external demand situation, China’s decision-making level must strengthen counter-cyclical adjustment, so its strength will exceed expectations. In terms of strengthening counter-cyclical adjustment, there is a high probability that it will be “three-pronged”:
The first is a more active fiscal policy. The implementation of this policy is already on the way, mainly to reduce taxes and fees, and to expand fiscal expenditure. According to statistics, in the first seven months of this year, the national tax revenue growth rate dropped by 13.7 percentage points year-on-year, while the general public budget expenditure increased by 2.6 percentage points year-on-year. It is expected that the next phase of fiscal policy will be more active.
The second is a loose monetary policy. Although we emphasize that China’s monetary policy is dominated by me and the current interest rate is reasonable, if there is a serious global economic recession, the PBOC is expected to “advance with the times” and implement more in the context of global central bank interest rate cuts. For a loose monetary policy, not only will the RRR be lowered and interest rates cut, but the intensity will also exceed expectations.
The third is to strengthen the infrastructure investment of “compensating for short boards”. In the case of more external demand decline, China’s decision-making level is likely to implement large-scale capital construction, taking this as a leader, stimulating rapid growth of domestic demand, achieving “inside the embankment loss” and ensuring that economic growth is within a reasonable range. In this respect, we do have a lot of “short boards” and a strong material base of capacity, so we have this ability and operation space. For example, there is a view that in the next 20 years, 80% of the country’s population will continue to flow into and live in first- and second-tier cities and other provincial capital cities, resulting in huge housing demand and utility demand. These are the basic construction spaces for China in the future, and can be done in advance. Therefore, in the case of a severe global economic recession, it is not possible to rule out the possibility of China launching high-intensity stimulus again.
Due to the large-scale capital construction, the demand of the steel industry has benefited more in many industries. Driven by it, the domestic demand for Chinese steel will once again show a “golden growth period”.
Post time: Aug-28-2019