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Global economy: Emerging patterns disfavour Asia; China: Outlook finely poised as political leaders grapple with challenges

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Highlights from the CAA Weekly Table

What has changed?

  • A glimmer of hope for regional trade agreements: There is somewhat more hope now that the ambitious RCEP agreement could be sealed, after India, the sole holdout, softened its position. Negotiations should conclude in November.
  • Disconcerting political trends: President Jokowi’s moral authority has been diminished by protests and his weak response to them, thus endangering his reform agenda. In Malaysia, the ruling coalition is at risk as Premier Mahathir’s manoeuvres over succession deepen suspicions that he is not serious about ceding power as promised. In protest-hit Hong Kong, increasing violence, signals of Chinese impatience and deepening divisions suggest an inflexion point is near.
  • Growing fears of slowdown in Asia, policy is responding slowly: The Modi government outlined more stimulus efforts to drum up animal spirits in India’s sluggish economy but a sustained recovery is not assured. There is little light at the end of the tunnel for the Philippines as far as tax reforms are concerned while policy rates are unlikely to budge in 4Q19. Broad-based weakness is evident in Thailand with buoyant tourism a sole bright spot.

Global economy: Emerging patterns disfavour Asia

  • The global slowdown, mostly concentrated in manufacturing, is now spreading to the so-far resilient services sectors in the G3. This together with the deepening rout in the global tech cycle, point to moribund export prospects for Asia.
  • Mounting resistance to monetary accommodation in the US and EU means that Asian central banks will have to tread cautiously in pursuing rate cuts to support their flagging economies.
  • Despite the more uncertain backdrop, Asian economies still remain on good footing for now.

China: Outlook finely poised as political leaders grapple with challenges

  • China took a step back to re-think strategy following the breakdown of talks on trade with the US in May. The political leadership has used the time wisely, successfully consolidating its political position whilst formulating a new strategy for the long-term which it is confident will place China in an even stronger position eventually.
  • Nevertheless, our view is that the near-term risks to growth remain high. Should these risks materialise, the policymakers’ reaction function of doing just enough to prevent a collapse in aggregate demand will be inadequate.
  • Barring a major shock to the economy, the economy will manage a controlled descent in the near-term as policy effectiveness has improved and the “buffers” which prevent risks from crystallising remain considerable.
  • We are sanguine on the long-term strategy that the authorities are in the midst of devising. That said, if it is to effectively place China on a robust footing for the long-haul, policymakers need to formulate a more convincing response to China’s long-suffering deficiency that is its sub-par productivity performance.

 

Hong Kong: Devoid of good scenarios, the long-term can only see decay; India: Heading into a perfect storm, growth takes a battering

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Highlights from the CAA Weekly Table

What has changed?

  • Global risk environment – further worsening: Capital spending, key to Asian exports, will continue to be tested as both Presidents Xi and Trump commit to toughing the trade war out and as a no-deal Brexit becomes more likely. A febrile geopolitical backdrop in the Middle East translates into an elevated risk premium in oil prices, though this will be offset by plentiful supplies and faltering global demand.
  • Asian economies are stepping up their policy responses: The Chinese economy is poised to slow further as domestic demand begins to slip; it is also storing up trouble for the future as leverage grows again. Key growth indicators are flashing red for the Korean economy; while an expansionary budget is welcome, it needs to be more surgical in focus. Singapore is likely to avoid a recession in 3Q19 off the back of pockets of resilience though the outlook remains murky beyond that. The Thai economy appears to have found some footing after a bruising first half of the year. Fiscal support will help to keep the Malaysian economy on an even track after a spirited performance in 2Q19.

Hong Kong: Devoid of good scenarios, the long term can only see decay

  • A bloody crackdown is unlikely to materialise, as Beijing is more likely to resort to calibrated repression to stifle the protest movement. Deft manoeuvring by Beijing will help contain the near-term impact on Hong Kong, China and the rest of Asia.
  • But there are poor portents for the longer-term. Hong Kong’s appeal as a global hub will be eroded gradually as Beijing enacts legal and regulatory changes to prevent more protests, but which will chip away at the unique status that has hitherto underpinned its appeal.
  • The only plausible winner from Hong Kong’s travails is Singapore, as it benefits from the out-bound diversion of financial services and tourism. The overall impact is unlikely to be substantially positive as both cities spur the other on through a modicum of competition.

India: Heading into a perfect storm as growth takes a battering

  • India’s economic growth slowed in 2Q19 to its weakest pace since 1Q13 as investments and household spending remained anaemic. Ditto for exports in view of a parlous external environment.
  • The immediate trigger for the downturn stems from the fallout within the non-bank financial company (NBFC) sphere. NBFC lending to the commercial sector dived in FY19, following the Sep 18 default by IL&FS, a large player in the market. Progress in resolving bad loans in the banking sector has slowed as the economy tumbled.
  • Withering rural and urban demand conditions are also weighing on the economy. Auto sales are in free-fall, factory output has flatlined and another year of bumper harvest will depress crop prices with ramifications for incomes and demand in the rural sector.
  • Further monetary easing is in the offing, but the spillovers to growth will be limited by deposit-starved banks to lower lending rates further. The government’s hands are tied, however, as it commits to fiscal consolidation and reforms of public sector banks to consolidate the banking industry.