UBS On-Air: Paul Donovan Daily Audio 'Scapegoat economics'

Paul Donovan · UBS Global Wealth Management

China's export-led growth model looks unsustainable as domestic demand stays weak amid rising economic nationalism.

China's officially reported Q3 GDP growth of 4.5% y/y makes the full-year official target likely to be met. The composition of that growth is the concern: despite a stronger September retail sales report, the domestic economy remains lackluster, and exports are the growth driver. Donovan says there is nothing inherently wrong with export-led growth, but in a period of rising economic nationalism driven by fear of the future, the sustainability of this model has to be questioned at the very least. He adds that the AI boom has also underpinned China's growth story 'for now'.

“Despite a stronger showing from the September retail sales report, the domestic economy in China remains lackluster. ... It is exports that are the driver of economic growth.”at 0:39

Paul Donovan · UBS Global Wealth Management

China's export growth has benefited from tariff avoidance, a pattern that economic nationalism now threatens.

Donovan argues China has been fortunate that its export growth has been helped by US companies and consumers being adept at avoiding tariffs, whether through skill or luck. He says this pattern is threatened by ongoing economic nationalism, which calls the sustainability of the export-driven growth model into question.

“China has either been adept at helping US consumers avoid tariffs or lucky in that its consumer base has the acumen to avoid paying domestic tariffs.”at 1:07

Paul Donovan · UBS Global Wealth Management

European and UK defence spending increases will likely stay within the region or diversify away from US suppliers.

Donovan points to a broader breakdown of trust between the US and Europe. Recent UK weapons contracts specified that US components should not be used. He argues that defence spending increases in Europe and the UK are therefore more likely to remain within the region. Where spending does go to imported defence procurement, it is likely to be spread more widely than buying only from the US. He frames this as an economic-nationalism effect.

“the defence spending increases taking place in Europe and The UK seem more likely to remain within the region. Or, where they are spent on imported defence procurement, it is likely to be spent in a more diversified way than just buying from The United States.”at 2:01