China Macro: GDP data beat expectations – Yesterday, annual real GDP growth for Q4-20 came in stronger than market expectations, including ours. Partly reflecting upward revisions to previous quarterly growth numbers, real GDP grew by 6.5% yoy in Q4-2020 (Q3-20: 4.9% yoy). That number is quite spectacular: it was higher than the latest pre-pandemic growth rate of 6.0% yoy in Q4-19. Annual growth over the full year of 2020 was reported at 2.3%. In line with our expectations, quarterly growth came in a bit softer than in Q3, at 2.6% qoq (Q3-20: 3.0% qoq), reflecting the fact that catch-up effects from the covid-19 shock in early 2020 continue to fade.
All in all, China is the only key economy showing positive annual growth in 2020. The key driver of this outperformance stems from the fact that China succeeded in getting the pandemic under control relatively quickly, with ‘second waves’ of the virus so far being relatively contained, both in absolute and relative terms. China’s sharp recovery from the covid-19 collapse in Q1-20 is mainly driven by industry and exports, underpinned by supportive fiscal and monetary policy. Chinese exports have profited from supply-side focused policies that have helped firms to get back to business quicker than their competitors, and from pandemic-specific demand for medical supplies and computer products (sectors for which China has a competitive edge).
China retail sales growth slowed in December – Meanwhile, private consumption is lagging, indicating that China’s aim to raise consumption’s share in GDP has clearly not taken off in the pandemic year of 2020. In the course of last year, annual growth of retail sales recovered from the covid-19 shock (although not as quickly as industrial activity), but this recovery started to flatten out in Q4-20. In fact, in December, annual growth of retail sales slowed to 4.6% yoy (November: 5.0%), the first such slowdown since the covid-19 related collapse in Q1-20. Consumption growth to a certain extent seems to have been dragged down by some tightening of safety restrictions and consumer cautiousness, with social distancing sensitive sectors such as passenger transport and the hospitality sector still underperforming. The recent modest flaring-up of the virus and new regional lockdown measures will likely continue to be a drag on consumption at the start of 2021, although the roll-out of vaccinations will likely help improve the situation during the course of this year.
Overall, we expect China’s outperformance to continue in 2021, partly driven by base effects. Annual growth will be very high in Q1-2021, as the historically weak Q1-20 will fade out of the numbers. We are currently reviewing our growth forecasts for 2021-22 and will publish these in our 2021 China Outlook that will be sent out later this week. (Arjen van Dijkhuizen)
Euro Politics: Dutch government resignation of little implication – Last Friday, the Dutch government resigned to take political responsibility over a child benefits scandal, in which the authorities unfairly treated thousands of parents. These families were treated as fraudsters and told to pay back childcare benefits, leaving many of them in financial problems. After months of investigations and two weeks of public hearings, a parliamentary research committee recently concluded that this matter’s level of injustice is unprecedented and that the principles of the rule of law have been violated. Consequently, Dutch Prime Minister Mark Rutte handed in his own and his full cabinet’s resignation to the King.
The resignation appears to be merely symbolic and likely has little implication – The resignation comes only two months before the planned parliamentary elections on March 17. Moreover, the Dutch House of Representatives was supposed to go into election recess four weeks ahead of the elections, on February 12. Therefore, the resignation appears to be largely symbolic, and will likely not have many operational consequences, even more so because Prime Minister Mark Rutte has announced that the government will remain fully active when it comes to fighting the coronavirus pandemic.
According to Dutch constitutional law, a so-called ‘caretaker cabinet’ does not lose its power to govern. Instead, whatever the cabinet is or is not allowed to do is determined in close cooperation with the House of Representatives. Even though cabinets which have resigned in the past largely abstained from major controversial topics in non-crisis times, recent history has shown that the Dutch cabinet is able to act decisively in actual crisis situations, and this time will likely not be any different. However, it may indeed become harder to find the majority which is needed for the implementation of far-reaching new coronavirus measures, even more so because the House of Representatives has the power to declare a topic or proposal to be ‘controversial’ if it judges that the topic or proposal is too politically sensitive and should hence be dealt with by the new cabinet.
Upcoming elections could result in more of the same – Prime Minister Mark Rutte is currently serving his third term, and will run for a fourth during the elections in March. The average of the polls is showing that his centre-right VVD (People’s Party for Freedom and Democracy), currently the largest party in the House of Representatives of the Netherlands with 33 seats, has gained popularity during the first months of the pandemic. It is currently on track to get 39 seats, which is about a quarter of the 150 seats that are up for election. Geert Wilders’ far-right PVV (Party for Freedom) comes second in the polls and it currently estimated to get 22 seats, followed by CDA (Christian Democrats, 18 seats), D66 (Democrats 66, 13 seats), Groenlinks (Green Left, 12 seats) and PvdA (Labour Party, 11 seats). The current government (made up of the VVD, CDA, D66 and CU – polling at 7 seats) would have enough seats to form the new government if the polls are correct. Although a slightly different make up is possible, a centre right government is still very likely. Still, if the polls prove to be slightly off or change, it is possible that five parties rather than four would be needed to form a majority. This could make government formation take even longer than it usually does. Meanwhile, the far-right euro sceptic PVV will likely again be shunned by other parties and will probably not be part of a new government, despite being the second largest party. (Floortje Merten)