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Asia’s Growth Is Shifting Down a Gear

Asia has been hit by a slew of weak gross domestic product reports for the third quarter, with global growth also sputtering at a time when rising interest rates and a U.S-China trade war threaten more pain.

China’s weaker-than-expected performance kicked off the gloom. Japan then got hit by natural disasters, while growth throughout Southeast Asia faltered as well as in South Korea, Hong Kong and Taiwan. India’s economy also slowed, economists predict ahead of a Friday report.

The global picture is changing with the U.S. economy now leading the growth story. Euro-area expansion slowed last quarter, held back by a contraction in Germany, while emerging markets like Russia and Argentina are stumbling.

Asia’s troubles may be far from over with the risk of an escalation in the U.S.-China trade war threatening exports, a main driver of growth. A series of monetary tightening actions in countries like Indonesia and the Philippines are also raising borrowing costs, putting pressure on consumer spending.

“Asia is shifting down a gear into year-end,” said Frederic Neumann, co-head of Asian economics research at HSBC Holdings Plc in Hong Kong. “Higher borrowing costs and financial market volatility, for example, are bound to restrain credit growth and push up debt servicing costs.”

Exports are showing signs of cooling after holding up for much of the year. There’s little room for officials across Asia to implement monetary and fiscal easing given the prospect of more Federal Reserve interest-rate hikes and the longer-term need to keep debt under control, said Neumann.

Here are the key outlooks for trade and central bank policies:

• Market expectations for a meeting this week between U.S. President Donald Trump and Chinese President Xi Jinping have wobbled. A U.S. tariff increase to 25 percent, from 10 percent, on $200 billion worth of Chinese goods is set to take effect at the start of 2019, with Trump sounding more sure of it
• After a blockbuster year for exports in 2017, ING Groep NV sees South Korea, Thailand, Singapore and Japan vulnerable to a weakening in electronics. It sees growth in China sliding to below 6.5 percent in the fourth quarter
• “Front-loading of purchases in late 2018, ahead of more painful duties, will exacerbate the impact in 2019,” according to Tamara Henderson at Bloomberg Economics
• “Even if the planned increases in tariffs are postponed or canceled, the outlook for exports is still poor,” according to Gareth Leather, senior Asia economist at Capital Economics Plc. “Our forecasts for a further slowdown in global growth suggest a tough year ahead for Asian exporters”

Trade as % of GDP 3Q exports growth (YoY %) 2Q exports growth (YoY %)
Hong Kong 375 5 4.6
Singapore 322 8 9.3
Malaysia 136 1.9 2.8
Thailand 122 -0.2 7.4

Notes: Hong Kong and Thailand show goods exports growth; Singapore is non-oil domestic exports; Malaysia is goods/services exports growth. Sources: World Bank, government data

Central Banking
• More rate hikes in the U.S. will keep pressure on Asia’s central banks to keep pace, and even those who’ve refrained from tightening like Thailand may soon follow
• Real interest rates in Asia hovering near or below zero is a sign that some central bankers might still be behind; the Philippines is most in trouble by this measure even amid 175 basis points of tightening so far in 2018
• “A desire to attract investment inflows will require maintaining a bias toward tighter monetary policy — at least until the Fed signals a pause in its hiking cycle,” said Henderson at BE

Source: Bloomberg

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