Monday, May 6, 2019

Asia: What could go wrong?

Trade tariffs, US interest rate, and Chinese growth issues are not settled yet

By Frederic Neumann, Co-head of Asian Economics Research

The world looks a little rosier this year. Markets are in a bullish mood, US interest-rate rises are more or less done, trade tensions seem almost resolved, and China is pumping things up again. But things could still go wrong for Asia.

First, trade. A further escalation of tariffs between the US and China might be avoided for now if the trade partners nudge towards a truce, even if existing restrictions aren’t promptly dismantled. But that won’t cure the broader trade malaise: the sogginess of the underlying trade cycle goes well beyond the US-China tariff tiff.

It’s tempting to argue that this year’s further dip in the region’s new export orders is merely a temporary slide and reasonably robust global labor markets, plus potentially stabilising demand in China, could ultimately deliver the kick needed to revive trade. But there are signs that the slowdown in exports could prove more persistent, as it was around 2015: demand for electronics, for instance, may recover only gradually.

Second, China. Credit started the year strongly and officials seem to be signalling greater readiness to provide more stimulus. But if the official growth target for 2019 is a range, that provides considerable ‘wiggle room’ compared to the previous point-targets and thus gives a wider array of potential outcomes and greater uncertainty for investors. Within the Chinese context, and for the world, an outcome of 6% would be materially different from 6.5%.

In addition, the fact that there is a seemingly greater readiness to support growth must be set against the possibility that China’s underlying demand has weakened more than officials expected – perhaps because of softening labor and/or housing markets. The recovery in growth might therefore turn out to be shallower than the headlines about stimulus measures suggest.

Third, the US Federal Reserve does seem to be near the end of its current tightening cycle. However, it’s not entirely clear that a pause in interest-rate increases is an unequivocal positive if it is not solely a reflection of muted US inflation rather than driven by disappointing growth elsewhere.

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