Asia’s Year of the Dog might be nearly over, but the latest economic forecasts point to a dog year for investors. With analysts barking increasingly loud warnings over the outlook, can the region get its groove back?
If Asian policymakers had any sense of complacency, it should have been erased with the latest gross domestic product (GDP) data released by China, the region’s largest economy.
Beijing admitted on January 21 that its economy is running at its slowest speed since 1990, with official GDP growth of 6.6 percent in 2018, down 0.2 percentage point on the previous year. Fourth-quarter GDP was also lower at 6.4 percent, down from 6.5 percent the previous quarter.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Analysts attributed the slowdown to the U.S.-China trade war, a slowing global economy, and domestic factors including deleveraging, although the growth rate still exceeded the official 2018 target of 6.5 percent set by the ruling Communist Party.
“The Chinese economy lacks momentum. Impact[s] from U.S.-China trade tensions are appearing and its adverse impact will continue. In addition to that, uncertainties over the global economy are increasing,” Toru Nishihama, chief economist at Dai-Ichi Life Research Institute, told Reuters.
“The focus will be [on] how China’s domestic demand will offset worsening external demand. It will be a close watch how the government’s measures, such as subsidies and infrastructure investment, will support domestic demand.”
Economists surveyed by Japan’s Nikkei newspaper suggest a further deceleration in the first half of 2019, with the world’s second-largest economy expected to slow further to just 6.2 percent GDP growth, according to an average of 32 economists’ forecasts.
Although Beijing has already responded by announcing further monetary easing, tax cuts, and increased infrastructure investment, the effects could be limited, analysts warn.
“Conditions improved somewhat in December, but we expect the uptick in industrial output and consumer spending to prove short-lived,” Capital Economics’ senior China economist, Julian Evans-Pritchard, said in a January 21 report.
Evans-Pritchard argues that China’s official GDP data “have been too stable in recent years to be a good guide to China’s economic performance. Our own measure, the China Activity Proxy (CAP), suggests that growth has already slowed by one percentage point since mid-2017.”
Capital Economics’ CAP suggests China’s economy slowed to around 5 percent GDP growth in December, and the London-based consultancy sees it dropping further to a relatively sluggish 4.5 percent by mid-year.
For China, the days of double-digit economic expansion appear long gone. For the rest of Asia, a slowing China threatens to further cloud the outlook for 2019’s Year of the Pig.
Capital Economics estimates that in the final two months of 2018, exports to China from the rest of “emerging” Asia contracted by around 10 percent year-on-year, compared to average growth of around 20 percent in the previous 10 months.
While the consultancy does not expect a sharp slowdown in China due to policymakers’ actions, it warns that an over-reliance on investment and credit growth to lift output could create “worrying vulnerabilities,” increasing the risk of a deeper downturn.
“A slump in China would hurt economies with close trade links, notably Taiwan and Vietnam, while commodity exporters would also be hit hard. A shift in investor sentiment against the region could also pose problems for India, Indonesia and the Philippines,” Capital Economics’ senior Asia economist Gareth Leather said in a January 22 report.
IMF Downgrades Forecasts
Just how worrying China’s vulnerabilities could become was demonstrated by the International Monetary Fund’s latest “World Economic Outlook” report, which points to a further slowdown in global GDP.
In its latest update, the Washington-based IMF downgraded its global growth forecasts to 3.5 percent in 2019 and 3.6 percent in 2020, 0.2 and 0.1 percentage point lower than its October projections, which were also down on the previous forecasts.
“The downward revisions are modest; however, we believe the risks to more significant downward corrections are rising,” the IMF said.
“While financial markets in advanced economies appeared to be decoupled from trade tensions for much of 2018, the two have become intertwined more recently, tightening financial conditions and escalating the risks to global growth.”
The IMF predicts decelerating growth for both advanced and emerging economies, with the former expected to slow from 2.3 percent GDP growth in 2018 to 2 percent this year and 1.7 percent in 2020. Emerging and developing economies are predicted to slow from 4.6 percent GDP growth last year to 4.5 percent in 2019, before a pick-up in 2020 to 4.9 percent expansion.
For the Asia-Pacific region, China is projected slowing from 6.6 percent GDP growth in 2018 to 6.2 percent this year and next, while Japan, the world’s third-largest economy, is seen posting GDP growth of just 1.1 percent this year and 0.5 percent in 2020.
India remains the region’s fastest growing major economy, with projected growth of 7.5 percent this year and 7.7 percent in 2020. The ASEAN-5 economies of Indonesia, Malaysia, the Philippines, Thailand, and Vietnam are also seen posting relatively stable GDP growth of 5.1 percent this year and 5.2 percent in 2020.
Overall though, the risks appear increasingly to the downside some 10 years since the global financial crisis rocked the world economy.
The IMF pointed to slowing trade and investment, softer industrial production outside the United States, and the risk of escalating trade tensions and worsening financial conditions.
“Higher trade uncertainty will further dampen investment and disrupt global supply chains. A more serious tightening of financial conditions is particularly costly given the high levels of private and public sector debt in countries,” the IMF said.
For policymakers, resolving trade differences “quickly” is essential, “rather than raising harmful barriers further and destabilizing an already slowing global economy,” the fund said.
“Across all economies, measures to boost potential output growth, enhance inclusiveness, and strengthen fiscal and financial buffers in an environment of high debt burdens and tighter financial conditions are imperatives,” it added.
The IMF’s gloomier forecasts came just days before Chinese Vice Premier Liu He was scheduled to meet with U.S. Trade Representative Robert Lighthizer for two days of trade talks.
Both sides face pressures to reach a deal that would prevent billions of dollars of additional tariffs.
Chinese President Xi Jinping has reportedly ordered that the nation celebrate the 70th anniversary of the communist republic’s founding with good economic performance, while U.S. President Donald Trump faces re-election in 2020 and needs to demonstrate his deal-making prowess against America’s strongest challenger.
With the March 1 deadline for a deal fast approaching, Asia and the rest of the world can only hope that the two economic heavyweights reach agreement and prevent a further chill to investor confidence. After all, the Year of the Pig is meant to signify good fortune for all.