Emerging Asia has been a powerhouse of world economic growth since the global financial crisis (GFC). However, amid slowing exports, the U.S.-China trade war, and worries over a global recession, can the good times continue?
In an August 14 report entitled “The Great Asian Moderation,” Capital Economics notes that emerging Asia has not only outperformed other regions since the GFC, but has also been the most stable. Emerging Asia has averaged 6 percent gross domestic product (GDP) growth for most of the post-crisis period at a level of volatility well below the rest of the world.
The London-based consultancy attributes some of this stability to “dodgy figures,” particularly China and Indonesia, which have shown “unusually stable” growth in recent years. Yet even taking this into account, less volatile external demand has helped contribute to a halcyon period of steady GDP growth for the region.
Other contributing factors include a lesser dependence on commodity exports (with the exception of Thailand, where they exceed 10 percent of GDP) and smaller external vulnerabilities.
Of the nations hit hardest during the 1997-98 Asian financial crisis, only Indonesia is still running a current account deficit, with Malaysia, South Korea, and Thailand having since moved into the black. Foreign currency debt has also declined as a proportion of GDP in these four countries.
This has allowed Asian central banks to loosen monetary policy when the outlook worsens, instead of being forced to hike interest rates to defend their currencies.
“The contrast with other EMs [emerging markets] is notable. Over the past few years, a number of EMs including Turkey, Argentina, Brazil and Russia have been forced to tighten monetary policy aggressively to support their currencies, plunging their economies into deep recessions,” the report states.
Fiscal policy in emerging Asia has also been relatively counter-cyclical, with most countries in the region having stronger fiscal positions than other EMs (with the exception of India and Malaysia). Similar to monetary policy, this has allowed Asia’s EMs to loosen the purse strings when times get tough.
However, it is not all good news for the region.
Capital Economics warns that government debt as a percentage of GDP has swollen since 2010 in South Asia and Vietnam, giving less scope to ease in the event of a full-blown crisis.
Private-sector debt has also risen at a rate “consistent with the onset of a banking crisis,” particularly in China, while Singapore, Thailand, Malaysia, and South Korea “all require careful monitoring.”
“Banks are almost certainly sitting on more bad debt than they acknowledge, and asset quality is likely to deteriorate further as the economy continues to slow. A policy misstep in the face of rising bad debt that causes interbank markets to seize up could precipitate a damaging financial crisis,” it warns.
Overall though, the consultancy still sees emerging Asia cooling only slightly in the face of weak global demand, with projected GDP growth seen dropping from 5.5 percent last year to 5 percent in 2019 and 2020.
ADB: Moderate Decline
Other forecasters also point to moderating growth ahead, albeit still at a brisk pace.
The Asian Development Bank (ADB) has projected developing Asia will expand at the rate of 5.7 percent in 2019 and 5.6 percent in 2020, only slightly down from the 5.9 percent expansion achieved last year.
“Even as the trade conflict continues, the region is set to maintain strong but moderating growth,” ADB Chief Economist Yasuyuki Sawada said in the July 18 report.
South Asia is still seen outperforming, with projected GDP growth of 6.6 percent this year and 6.7 percent in 2020, with India tracking at around 7 percent.
In East Asia, China is still seen posting GDP growth above 6 percent thanks to policy support, with forecasts of 6.3 percent this year and 6.1 percent in 2020.
However, Southeast Asia could slow to 4.8 percent this year and 4.9 percent in 2020, “due to the trade impasse and a slowdown in the electronics cycle.”
Meanwhile, Japan, the world’s third-largest economy, is seen posting 0.8 percent GDP growth this year and just 0.6 percent in 2020, with October’s consumption tax hike set to weigh together with weakening exports.
The ADB sees trade tensions between the United States and China, the world’s two largest economies, as the “largest downside risk” to its relatively benign outlook.
A separate ADB report estimates the trade spat could cut GDP growth in China by up to 1 percentage point and by 0.2 percentage point in the United States over a two to three-year period. Any such slowdown in China would hit the rest of the region hard, including commodity exporters such as Australia.
Nevertheless, amid such relatively sunny outlooks, the International Monetary Fund (IMF) has pointed to growing global risks, notably the impact of U.S.-China tariffs, which could cut 0.5 percentage point from global GDP by 2020.
“Further, a surprise and durable worsening of financial sentiment can expose financial vulnerabilities built up over years of low interest rates, while disinflationary pressures can lead to difficulties in debt servicing for borrowers,” the Washington-based institution said in a July 23 report.
“Other significant risks include a surprise slowdown in China, the lack of a recovery in the euro area, a no-deal Brexit, and escalation of geopolitical tensions.”
The IMF said the global economy “remains at a delicate juncture. It is therefore essential that tariffs are not used to target bilateral trade balances or as a general-purpose tool to tackle international disagreements.”
The warning appears to have fallen on deaf ears however, with U.S. allies Japan and South Korea now engaged in a tit-for-tat trade dispute, while Britain heads toward an apparent “no deal” Brexit that would further destabilize financial markets.
U.S. President Donald Trump’s move to postpone further tariff hikes on Chinese imports to December only mildly placated markets, which quickly turned their attention to an inverted bond yield curve – an indicator of U.S. recession – together with poor economic data in Germany and China to wipe billions of dollars off stockmarket valuations.
Yield curve warning signs are also flashing red in Asia, with the difference between China’s 10-year and two-year yields narrowing to just 30 basis points, while Singapore’s slipped into negative territory Wednesday.
Amid such turmoil, Asia’s policymakers will need all the fiscal and monetary breathing space at their disposal to maintain the region’s expected continued economic expansion.