Pacific Money

Can Asian Growth Survive Trade Threats?

Recent Features

Pacific Money

Can Asian Growth Survive Trade Threats?

So far, so good for Asia’s growth projections. But how long can that last?

Can Asian Growth Survive Trade Threats?
Credit: Pixabay

Asia is seen shrugging off the threat of a U.S.-China trade war, with only a slight deceleration in economic growth projected by the Asian Development Bank (ADB). Ensuring this rosy scenario continues will take more than good luck, however, amid warnings that the global trading system could fall apart.

In its latest “Asian Development Outlook 2018,” the ADB said developing Asia, defined as the 45 members of the ADB, expanded by 6.1 percent last year on the back of solid export and domestic demand. However, this is seen slowing to 6 percent in 2018 and 5.9 percent next year, the Philippines-based institution said.

Excluding “high-income” newly industrialized economies comprising Hong Kong, Singapore, South Korea, and Taiwan, growth is projected to reach 6.5 percent this year and 6.4 percent in 2019, down slightly from last year’s 6.6 percent.

“Economies across developing Asia will maintain the current growth momentum driven by sound policies, expanding exports, and robust domestic demand,” said the ADB’s chief economist, Yasuyuki Sawada.

“Strong regional trade links and rising financial buffers position the region well to withstand potential external shocks, including the risks of rising trade tensions and rapid capital outflows.”

The ADB pointed to an ongoing recovery in industrial economies, with the United States, Eurozone, and Japan seen collectively expanding by 2.3 percent this year before slowing to 2 percent in 2019.

“Recently enacted tax cuts will fuel growth in the U.S. as the Federal Reserve keeps inflation in check through gradual monetary tightening. Meanwhile, rising business confidence and easy monetary policy will support growth in the euro area and Japan,” it said.

For China, the world’s second-largest economy, the ADB sees growth slowing from 6.9 percent in 2017 to 6.6 percent this year and 6.4 percent in 2019 on the back of “mildly tighter” fiscal and monetary policies.

“Further progress on reforms such as strengthening financial sector regulation and supervision, and addressing debt issues would lay a foundation for solid macroeconomic stability,” the ADB said.

In contrast, India is expected to rebound following a growth dip on the back of demonetization and the introduction of a national consumption tax. From a disappointing 6.6 percent in 2017, the South Asian powerhouse is seen expanding by 7.3 percent in 2018 and 7.6 percent in 2019, reclaiming its title as the region’s fastest growing major economy.

Meanwhile, growth in Southeast Asia is tipped to remain steady this year and next, expanding by 5.2 percent, the same growth rate as in 2017.

“Although an expansion of technology exports in 2017 will moderate somewhat, recovery in global commodity prices should continue to support exporters of primary goods. Growth in Indonesia, the Philippines, and Thailand will accelerate thanks to strong investment and domestic consumption, while Vietnam will benefit from continued expansion of its industrial base,” the ADB said.

The ADB’s generally robust outlook follows the OECD’s recent projections of a stronger global expansion in 2018-19, with the global economy tipped to expand by 3.9 percent this year and next, up from 3.7 percent in 2017.

In its “Interim Economic Outlook” released March 13, the Paris-based organization forecast improved gross domestic product (GDP) growth for the United States and the Eurozone. India is also seen picking up, with projected GDP growth of 7.2 percent this year and 7.5 percent in 2019.

In contrast, China is seen slowing to 6.7 percent this year and 6.4 percent in 2019, while Japan, the world’s third-largest economy, is projected to cool from 1.7 percent GDP growth last year to 1.5 percent in 2018 and just 1.1 percent in 2019.

Trade, Debt Risks

Nevertheless, both the ADB and OECD have warned of the threat of an escalation of trade tensions to jobs and growth.

“Protectionist trade measures implemented by the U.S. so far in 2018 have not discernibly dented buoyant trade flows to and from developing Asia. However, further actions and retaliation against them could undermine the business and consumer optimism that underlies the regional outlook,” the ADB said.

The bank also warned of the risk of diminishing capital inflows should the Fed hike interest rates at a faster pace than expected by financial markets, although it said last year’s trade revival had “built up financial buffers in many Asian economies.”

The ADB also noted developing Asia’s rapid accumulation of private debt, despite the opposite occurring in the United States and other advanced economies.

In China, the corporate debt ratio to GDP rose from 96 percent at the end of 2008 to 163 percent at the end of the third quarter of 2017. In the same period, the household debt ratio climbed from 50 percent to 67 percent in Malaysia, 74 percent to 94 percent in South Korea, and 45 percent to 68 percent in Thailand.

“Evidence shows that the positive effect of household debt growth in emerging economies typically dissipates after two years, turning negative in the medium term,” the ADB said. “Similarly, corporate debt growth does not seem to have any persistent positive effect on output growth.”

In an April 5 report, Capital Economics described the growing threat of a U.S.-China trade war as “the key risk to the outlook.”

“The tariff measures announced so far don’t amount to much, but any escalation in trade tensions that leads to a significant fall in U.S. imports from China would have a sizable impact, not just on China, but also on other countries such as Taiwan and Malaysia which export a lot of intermediate goods to China,” the London-based consultancy said.

“Even if trade tensions don’t worsen, GDP growth in emerging Asia has peaked and is likely to ease over the coming year.”

Capital Economics sees “mainland China” slowing from an estimated 5.8 percent GDP growth last year to just 4.5 percent this year and next, weighed down by a slowing construction sector and tighter fiscal policy.

For “emerging Asia” as a whole, it sees growth cooling from 5.6 percent in 2017 to 5 percent this year and next.

“With the risks to growth tilted to the downside and inflationary pressures subdued, policy rates are likely to remain low,” it said, suggesting the potential for lower rates in Indonesia and Sri Lanka.

The warnings follow recent comments in Hong Kong by Christine Lagarde, managing director of the International Monetary Fund that the current multilateral trading system “is now in danger of being torn apart… an inexcusable, collective policy failure.”

For a region desperately seeking to avoid the fallout from a U.S.-China trade spat, there is little room for complacency.