How will Asian economies fare in a more turbulent global economy?; Competitiveness: SE Asia rises; reform impetus to reinforce this trend

Highlights from the CAA Weekly Table

What has changed?

• Global economy: The latest purchasing manager surveys reflect a general slowing in the world economy including emerging Asian. However, there are pockets of resilience in Asia due to production relocation and trade diversion. With both the Federal Reserve and the European Central Bank signalling easier monetary policy, Asian central banks will have greater leeway to cut rates as well.
• Asian economies: As the Rupiah has shown resilience of late, we think that Bank Indonesia is becoming more confident about moving ahead with a rate cut in the next few months. Signs of a slowdown in the Indian economy all but guarantee another rate cut soon, but its ability to revive economic activity will be muted as the undercapitalized banking sector will not be able to step up lending. An uptick in exports is a positive for trade-reliant Malaysia, but is unlikely to last given the parlous outlook for global trade. A benign inflation outlook suggests more rate cuts are in store for the Philippine economy. With external demand in the doldrums, fiscal support will be key for the Thai economy to remain on an even keel. However, political infighting could jeopardize timely passage of the next budget.

Asian political risks: More worries about succession to Prime Minister Mahathir have surfaced: the resulting uncertainty will be yet another headwind for the economy.

How will Asian economies fare in a more turbulent global economy?

• With business confidence hit by turbulence in world trade and geo-political risks, global demand for Asian exports is losing momentum. While some automatic stabilisers – lower bond yields and lower oil prices – have kicked into action, they will not be sufficient, nor will they be sustained.
• Against this perilous backdrop, relative economic performance in Asia will be a function of 1) the scope for domestic demand to offset external demand weakness, 2) supply-side positives, 3) domestic fragilities which are worsened by a serious trade shock, and 4) the perennial bugbear that is vulnerability to destabilizing capital outflows.

Competitiveness: SE Asia rises, and reform impetus will reinforce this trend

• The International Institute for Management Development (IMD)’s latest competitiveness report indicates that emerging Asia is climbing up the rankings and closing the gap with East Asia. China, Singapore and Indonesia are standout performers, while Hong Kong, India and Thailand pencilled in modest gains. Taiwan, South Korea, Philippines and Malaysia are the relative laggards.
• We see two trends which will add a fillip to the region’s performance. First, with major elections strengthening reformist governments, more ground-breaking reforms are likely in Indonesia and India. Second, the effort to tackle the infrastructure deficit in the region is gaining steam.

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