Asia Watch – Elections near, headwinds are ebbing

by: Arjen van Dijkhuizen

  • Regional growth in emerging Asia slowed in 2nd half 2018, …
  • … but momentum improves on China stimulus, more constructive trade talks
  • We expect regional growth slowdown to remain very gradual in 2019-20, …
  • … with India remaining the fastest growing emerging giant
  • Risks stem from global protectionism and impact on supply chains …
  • … and from other (geo)political risks including a heavy election calendar …
  • … with elections near in India, Indonesia and the Philippines
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Regional growth has slowed in recent quarters, …

After reaching cyclical highs of 6.4% yoy in H1-2018, regional growth in Asia ex Japan slowed materially in H2-2018. Our GDP-weighted regional growth tracker slowed to 6.0% yoy in Q3-2018 and to a post-global financial crisis low of 5.8% yoy in Q4-2018. This regional slowdown was driven by a combination of factors. The effects of previous global monetary tightening (in China and other parts of emerging Asia, but also in the US and other advanced economies) were aggravated by the escalation of the trade conflict between China and the US, with the US and China implementing import tariffs over a total of USD 360 bn in bilateral trade last year. Trade tensions contributed to a global decline in investment in machinery and equipment, that went hand in hand with a slowdown of global trade. These and other factors (such as payback to frontloading) triggered a collapse of global trade at the end of 2018, although CPB trade volume data are distorted by the relatively long US government shutdown at the turn of the year. Reflec-ting the risks for Asia-centered supply chains, the trade conflict also contributed to a region-wide drop in business confidence, asset market corrections and a tightening of financial conditions.

… particularly in China, India and global bellwethers

The Chinese economy started to show more signs of slowing in the second half of last year, with official growth dropping from 6.7% yoy in Q2-18 to 6.4% in Q4-18. Trade hubs like Hong Kong, Singapore and Taiwan showed a sharp slowdown in the course of last year, as these global bellwethers are sensitive to developments in global growth/trade. In India, less exposed to the global business cycle and the US-China trade conflict, growth also slowed in 2H18, driven by domestic consumption. In South Korea and Thailand, annual growth dropped significantly in Q3-18, but picked up again in Q4. In Indonesia and Malaysia, growth remained stable during H2-18.

… but momentum is improving as China’s piecemeal easing starts filtering through …

Still, high-frequency indicators suggest that the worst may be behind us. Our regional manufacturing PMI has bounced back recently, although divergence remains. Currently, manufacturing PMIs are highest for India, Vietnam, Indonesia, Singapore and China, but still below the neutral 50 mark for Malaysia, Hong Kong, South Korea and Taiwan. PMI export indices are also improving recently, while the latest global trade volume data from CPB and trade value data also point to some bottoming out (China’s March trade data are due next Friday). This turnaround is partly related to the ebbing of headwinds that caused the slowdown last year. Since mid-2018, Beijing has put macro-economic stabilisation at the top of the priority list. The policy shift from targeted tightening/financial deleveraging to piecemeal monetary and fiscal easing has started to filter through, with the Chinese economy showing more signs of stabilisation.

  

… and a US-China trade deal is in sight, although tech competition will likely linger on

We have become more optimistic about the prospects of a US-China trade deal, following the truce agreed last December. High-level talks have resumed, and both parties underline the progress made (although a follow-up presidential meeting has not been scheduled yet). Asian stock markets have done better following this truce. A deal that would exclude a further rise of bilateral import tariffs would be crucial for the Asian macro and markets outlook. That said, strategic competition between the US and China will probably linger, while the Huawei case shows that the trade war has shifted to a tech war. US Hawks will likely keep pushing for restrictions on strategic exports and FDI. The EU has also sharpened its stance versus China.

We expect regional growth slowdown to remain very gradual in 2019-20

We expect the regional slowdown to remain very gradual, with regional growth in emerging Asia dropping from 6.1% in 2018 to 6.0% in 2019 and 5.8% in 2020. Hence, we expect emerging Asia to remain a key engine of global growth. With headwinds fading, we expect China’s slowdown to remain gradual, with growth dropping from 6.6% in 2018 to 6.3% and 6.0% in 2019-20. We expect growth in Hong Kong and Singapore to fall from around 3% in 2018 to 2.5% in 2019. We anticipate India to remain the fastest growing giant, with a slight acceleration foreseen (from 7.2% in FY 2018-19 to 7.5% in the coming fiscal years). We also expect a slight uptick in Indonesian growth this year. For Malaysia, South Korea, Taiwan and Thailand, we expect growth to remain more or less at the same levels as in 2018. Compared to our previous Asia report published in January, we cut our 2019-20 growth forecasts for Malaysia by 0.5 %-point, to 4.5%.

With inflation subdued and Fed more dovish, monetary policy stance has eased

Regional inflation has come down sharply since October 2018. The drop in headline inflation is related to the downturn in commodity prices end-2018, but regional core inflation has also fallen. With growth momentum improving, we expect some turnaround of inflation throughout the region from the current low levels. But given a.o. the current low inflation levels and a more dovish US Fed, we expect the dovish twist amongst emerging Asian central banks to continue. That contrasts sharply with the autumn of 2018, when several Asian central banks (particularly in external deficit countries Indonesia, Philippines and India) were forced to hike policy rates to stem pressures on currencies and FX reserves. There is also still room to add fiscal stimulus in most countries, given that public finance indicators in Asia (ex Japan) are relatively strong.

Focusing on the two largest economies, we expect the Chinese authorities to continue with piecemeal monetary (for instance by further, targeted cuts of banks’ reserve requirements, RRRs) and fiscal easing. We do not expect aggressive easing, given Beijing’s balancing act between safeguarding growth at the short term and ensuring orderly financial deleveraging over the longer term. In India, our expectation of a more dovish monetary policy under new governor Das has materialized. In the first two rate setting meetings chaired by Mr. Das (in February and April), the RBI cut the repo rate twice by 25 bp (to 6.0%). Given rising upside risks to inflation, we expect the RBI to remain on hold throughout 2018. Still, should inflation turn out lower than expected, we see room for another cut or two, given that India’s policy rate in real terms is still relatively high.

Risks to the outlook stem from global protectionism and impact on supply chains …

Although the likelihood of a US-China trade deal has risen, the more protectionist stance around the globe remains a key risk for emerging Asia. This export-oriented region is highly exposed to global supply chains, including US-China centered supply chains. In Hong Kong, Singapore, Vietnam, Taiwan, Malaysia, Thailand and South Korea, goods exports correspond to at least 40% of GDP. Moreover, the US and China are key export destinations, particularly for Hong Kong, Taiwan and South Korea (China first destination) and Vietnam (both China and US). While more protectionist policies poses risks, some countries could benefit from trade tensions (e.g. some supply chains could move from China to countries like Vietnam). Meanwhile, the strengthening of regional trade arrangements would mitigate risks from global protectionism over the longer term.

  

… and from other (geo)political risk factors including a heavy election calendar

The strategic competition between the US and China is also reflected in wider geopolitical tensions in Asia: the situation on the Korean peninsula, the relationship between Taiwan and mainland China and China’s attempts to secure control in the South China Sea. While we do not expect serious escalation, risks of policy failures and accidents remain. Meanwhile, 2019 is also an important election year for emerging Asia:

·          In India, the world’s largest democracy with around 900 eligible voters, general elections will kick off this week, but it will take until 23 May before results will be announced. We expect PM Modi’s ruling National Democratic Alliance to win the elections, but it remains to be seen whether the NDA will keep its parliamentary majority. Its performance in polls has clearly improved since the flaring-up of tensions with Pakistan. Still, should the NDA lose its majority, that will complicate the position of Modi and NDA to implement further reforms.

·          On 17 April, for the first time in history, parliamentary and presidential elections will be held simultaneously in Indonesia. As in 2014, incumbent president Jokowi will face former general Prabowo Subianto, leader of the opposition Great Indonesia Movement Party (Gerindra). This basically comes down to a race between Indonesia’s moderate Muslims (Jokowi) versus more conservative ones (Subianto).

·          On 13 May, general elections will be held in the Philippines.

·          In late March, general elections were held in Thailand, the first free elections (postponed several times) since the military coup in 2014. According to interim results (official results are expected in May), the pro-military party (PPRP) won the popular vote. The Pheu Thai party – affiliated with former PM Thaksin Shinawatra – gained the highest number of seats in the Lower House. Still, as the military junta has introduced a new electoral system, it is likely that incumbent PM and junta leader Prayuth and a PPRP coalition will remain in power.