China's Goal

Here are some of the biggest stories from last week:

• China set an official 2024 economic growth target of “around 5%”.
• Clean energy was responsible for 40% of China’s economic growth in 2023.
• The European Central Bank held interest rates steady.
• Japan’s Nikkei 225 index breached the 40,000 level for the first time ever.
• OPEC+ extended its voluntary supply cuts to the middle of the year.
• The world’s biggest digital currency touched a new record high.

Dig deeper into these stories in this week’s review.

Macro

In a move widely expected by economists, China’s government set an official GDP growth target of “around 5%” for 2024, mirroring last year’s objective. Analysts were quick to point out that the goal will be harder to achieve than in 2023, when growth, which came in at 5.2%, was helped by a low base effect due to pandemic restrictions in 2022. What’s more, the economy is still struggling with some of the same headwinds from last year, including a property slump, entrenched deflation, and high levels of local debt. Economists reckon that the economy will likely expand by 4.6% this year, saying that the only way for China to meet its ambitious 2024 goal is through substantial stimulus measures. But that’s something policymakers have so far been hesitant to implement, as they try to break the country’s reliance on debt-driven growth.

Adding to the challenges, the government announced a 3% inflation target for the year, meaning that the country is aiming for nominal economic growth of about 8% for 2024. In reality, China is battling the longest period of deflation since the late 1990s, and the economy only expanded by 4.6% last year in nominal terms (i.e. before adjusting for inflation). And with prices still falling, an ambitious nominal growth target of 8% could be a longshot…

One thing China-watchers are starting to flag is the country’s increasing dependence on the green economy for growth. China has been investing significant sums into the sector in recent years, with a heavy emphasis on what officials like to dub the “new three” industries of solar power, EVs, and batteries. In fact, China’s clean energy sector contributed a record 11.4 trillion yuan ($1.6 trillion) to China’s economic output in 2023, with the “new three” industries the biggest drivers, according to the Centre for Research on Energy and Clean Air (CREA). That meant the clean energy sector accounted for a staggering 40% of China’s economic growth last year.

Here’s how big that is: without the contribution of the clean energy sector, China’s economy would’ve grown by just 3% last year, instead of 5.2%, according to CREA’s calculations. That would’ve left it significantly short of the government's 5% growth target at a time when concerns over the nation's economic outlook are intensifying. 

Now, the good news is that the green surge is providing a new lease of life to China’s investment-led economic model and is helping to partially fill a massive gap left by the shrinking real estate sector. The bad news is that China’s new dependence on the green economy could run into trouble if it ends up overproducing. Put differently, the threat of overcapacity means China’s stepped-up spending on clean energy – and its investment-driven economic model in general – can’t continue indefinitely.

Over to Europe. As expected, the European Central Bank held interest rates steady at an all-time high of 4% for a fourth consecutive meeting. It also lowered its projections for both inflation and economic growth, which bolstered traders’ expectations for rate cuts to begin this summer. The central bank’s latest outlook now puts inflation at 2.3% this year (down from the 2.7% it predicted in December) and revises the 2025 forecast lower to 2%. The economy, meanwhile, is seen expanding by 0.6% in 2024 versus 0.8% previously. Growth is expected to rebound to 1.5% next year, supported by consumption and investment, according to the ECB.

Stocks

The Nikkei 225 index reclaimed its 1989 peak last month after global investors piled into Japanese stocks on improving shareholder returns, booming corporate profits, and an extended period of weakness in the yen (which boosts the country’s exporters). Corporate governance reforms and an endorsement by Warren Buffett last year have also boosted sentiment. And now, Japan’s biggest backers had even more reason to celebrate after the Nikkei 225 extended its historic rally to climb above the key psychological level of 40,000 for the first time ever on Monday. With the structural factors driving the advance still in place, analysts expect the milestone to act as a bullish signal that fuels further gains rather than spark concerns about Japanese stocks being overbought. Time will tell if that proves to be true.

Commodities

In an effort to reverse falling oil prices, OPEC+ has announced several production cuts and extensions to these curbs since 2022. These include a voluntary reduction of 2.2 million barrels per day (mb/d) that was due to expire at the end of March. However, facing a slowdown in global oil demand and a huge surge in supply from the US, OPEC+ decided to extend those cuts, announcing over the weekend that they’ll keep them in place until the end of June. Traders had largely expected the decision, with Brent oil prices rising 2% the previous week to $83 a barrel. But that’s way below the roughly $100 a barrel needed by Saudi Arabia – the cartel’s de facto leader shouldering most of the production curbs – to fund its ambitious economic transformation program.

To put the oil market’s supply and demand outlook into perspective, consider this: the International Energy Agency predicts demand will grow by 1.2 mb/d this year – or about half the pace of 2023. At the same time, it expects oil supply to increase by 1.7 mb/d to a record 103.8 mb/d in 2024, almost entirely driven by producers outside OPEC+, including the US, Brazil, and Guyana. That makes sense considering that the cartel’s series of curbs, from voluntary cuts to unilateral ones by Saudi Arabia, have crimped oil production by around 5.3 mb/d – or about 5% of global supply.

The 17-year boom in US shale might have America enjoying its growing energy self-sufficiency, but it’s been a big headache for OPEC+. It’s not just that the US is producing more crude and therefore buying less: it’s that the country isn’t part of the cartel. Put differently, OPEC+ can agree to cut production all it wants, but that won’t stop the US from flooding the market with oil. That’s why the group’s supply cuts have done very little to lift oil prices. What’s more, American output has been very tricky to predict, with the recent surge happening despite the country running fewer drilling rigs (thanks to efficiency improvements).

Crypto

Another week, another bitcoin milestone, no this time a rather huge one: the token briefly hit $69,200 on Tuesday, marking a new all-time high for the world’s biggest cryptocurrency. The same factors we’ve been talking about in the past few weekly reviews drove the surge, including excitement about the upcoming “halving” and relentless buying from the newly approved US spot bitcoin ETFs, which have seen almost $10 billion worth of net inflows since their launch on January 11th. 

Next week

• Monday: Monday: Nothing major.
• Tuesday: US inflation (February), UK labor market report (February).
• Wednesday: China foreign direct investment (February), UK GDP (January), eurozone industrial production (January).
• Thursday: US retail sales (February), US producer price index (February).
• Friday: US industrial production (February), China new house prices (February), US consumer sentiment (March).