Asia back on course

A boost from Beijing while the US backs off should limit any slowdown

28 March 2019 Frederic Neumann, Co-Head of Asian Economics Research

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Economic activity in much of Asia started to sag at the end of 2018. Higher US interest rates boosted the dollar, upsetting financial markets in emerging economies that are especially sensitive to changes in global funding costs. Then, US-China trade tensions threatened exports in an already weakening world economy, and China’s global growth engine started to sputter.

But now some light is starting to shine through. The US Federal Reserve has signalled a pause to its tightening cycle, relieving pressure on hard-pressed borrowers. There are signs of a truce between China and the US. And China is shoring up growth, cutting taxes and loosening the monetary reins.

Nevertheless broader, structural challenges continue to weigh down growth. The industrial cycle remains weak, with poor demand for electronics and automobiles posing headwinds for exports, including within Asia. The expected easing, both monetary and fiscal, in developed markets will also have only a limited effect on reviving growth.

Fortunately, China has unveiled a considerable stimulus. The tax cuts alone could amount to more than 2 per cent of GDP, possibly raising growth by 0.5 percentage point by mid-2019. Risks remain - including a housing downturn that slows growth – but Beijing has deep fiscal pockets to boost demand.

Stronger Chinese growth should help to put a floor under trade throughout the region, especially benefitting Asia’s export-dependent economies. While Hong Kong’s growth will be down from last year’s 3.0 per cent, we still expect 2.7 per cent for 2019, helped by stabilising interest rates. And although tech demand remains a challenge for Taiwan, its GDP can still expand by 2.3 per cent.

Japan is exposed to weaker exports too, but local consumption should help prop up demand, boosted by spending ahead of October’s expected sales-tax hike. But while that could lift growth to 0.9 per cent this year, it may trigger recession in 2020.

We’ve cut our 2019 forecast for Australian growth from 3.0 per cent to 2.5 per cent as the housing market weakens, even though job growth remains red-hot, exports are high and a budget now almost back in balance allows extra fiscal spending that could a cushion the real-estate wobble.

Business sentiment In New Zealand is shaky but robust consumer spending should maintain growth at 2.8 per cent.

We expect India’s economy to expand by 7.2 per cent this year but national elections will be key in determining the reforms critical to sustaining that growth. Bangladesh’s growth could exceed 8 per cent in the year to June.

The Asean countries have been remarkably resilient to last year’s financial-market turbulence. Interest-rate hikes barely dented demand in Indonesia and the Philippines: following elections in each, Indonesian investment may pick up while Manila’s budget should release funds for further infrastructure spending.

Vietnam, Malaysia, and Thailand are enjoying a renewed competitiveness that should support growth and investment, even if governments eventually have to examine their spending. Singapore, though also building on its competitiveness in new sectors from finance to technology, remains highly exposed to the global trade cycle.

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