AS the season of multiple summits in Asia — Apec (Asia-Pacific Economic Cooperation forum), Asean and the G20 — gets underway, it has become fashionable to see the US as a diminished power, inexorably ceding its dominant role to rising powers such as China.
Certainly, President Barack Obama came to Asia dogged by concerns over his diminished political clout after the Republican opposition trounced his Democratic Party in the mid-term elections. In foreign policy terms as well, Obama’s America is seen as hesitant and outmanoeuvred by craftier rivals such as Russian President Vladimir Putin, a stumbling giant whose indecisiveness stands in sorry contrast to a purposeful China.
This view is not accurate. America clearly has its challenges, but the hard reality remains that it is still the single most important determinant of Asia’s political and economic fortunes over the near term, as well as medium term. For better or worse, what happens in America will have a disproportionate impact in our region. So, it is worth taking a step back and assessing where its politics and economy are heading and what that means for Asia.
Politics: Obama on the back foot, negative for Asia
Obama is at risk of being a lame duck president for the remaining two years of his term. His Republican Party opponents now control the Senate as well as the House of Representatives and have exceeded expectations by winning the governorships of more states, including some that were Democratic strongholds. Republicans can now pass legislation that undermines Obama’s agenda, or implement measures at the state level that roll back signature Obama policies, such as his groundbreaking healthcare reforms. Obama can no longer secure legislative approval for any major policies unless he makes substantial compromises that would offend his political base.
There is, however, a more optimistic read on the mid-term elections, which argues that Obama and the Republicans will now compromise in some areas so there will be some progress in tackling the pressing long-term challenges the US faces. Both sides did make soothing noises about working together in the immediate aftermath of the elections, realising that the American voter is tired of partisan politics and will penalise the party seen as most obstructive in the 2016 elections. The Republicans realise that the voters, having given them control over both houses of Congress, now expect them to contribute to effective governance, and not keep obstructing Obama in every way possible.
In this interpretation, progress in the Trans-Pacific Partnership which the US is negotiating with several Pacific countries, including Malaysia and Singapore, becomes more likely. After all, one area where both Obama and the Republicans have common interests is in trade — he is keen on securing Congressional support for his international trade initiatives, while the Republicans have tended to support free trade and could be open to giving Obama Trade Promotion Authority. The TPA would give him a legal mandate to negotiate a treaty without intrusive Congressional amendments, and make the TPP easier to achieve. If the TPP does materialise, that would certainly be good for trade and investment in Asia, with particular benefits for Malaysia and Singapore, the two most open economies in Asean.
Still, this positive interpretation sounds unrealistic. The political class in America will now be focused intensely on the 2016 elections, when a new president will be elected to replace Obama. The Republicans would be loath to hand him and his Democratic allies anything resembling a policy victory. Both sides will focus on shoring up their electoral bases, which means not compromising on hot-button issues such as immigration. Obama’s insistence that he will bypass Congress by using executive orders to push through immigration reforms could well infuriate the Republicans to the point where they turn obstructionist again. Obama’s actions in this area reflect cold political calculations of what it will take to win over key voting segments such as the Hispanics. The trouble is squabbles over such issues will make compromises difficult.
Even if Obama were to be given TPA, the timetable for an agreement on the TPP to be reached so that it could then be passed by Congress is narrowing. Given the electoral timetable leading up to the 2016 presidential elections, TPP is not going to happen unless a full-scale agreement is ready for Congress to approve by around the middle of 2015. Moreover, while Obama securing TPA could well persuade the Japanese to make the critical concessions necessary to break one of the current logjams in TPP talks, it is still not clear if other logjams concerning other countries’ reservations on US demands can be cleared.
In short, US politics will still be a negative for Asia.
US economy is strengthening enough for policy to tighten ahead of expectations
The case for an abrupt recalibration of US Federal Reserve policy by financial markets is growing stronger by the day:
• The US labour market is on a tear: Non-farm payrolls rose 214,000 in October, while the unemployment rate edged down again to 5.8%. As estimates for payroll growth in August and September were raised by 30,000 in total, employment growth has been running at above 200,000 for the longest stretch since 1995. Measures of under-employment also fell. Wage growth remains tepid, at an annualised pace of around 2%, but this could improve soon. Surveys of businesses, including small businesses which are the biggest employers, suggest an acceleration in hiring in coming months, pointing to yet further falls in the unemployment rate, which would then allow faster wage growth.
• Consumer spending could accelerate: The sharp fall in oil prices is now translating into falls in gasoline prices, which have a disproportionate impact on consumer perceptions of their real incomes. This is probably one reason why measures of consumer confidence have soared: The Thomson Reuters/University of Michigan consumer confidence index for October leapt to 86.9 from 84.6 in September, reaching the highest level since July 2007, just before the financial crisis erupted in full strength.
• Economic activity data is mixed but the overall trend remains strong: Construction spending and factory orders declined in September, but overall measures of economic activity captured in purchasing manager indices for both manufacturing and services suggested relatively strong overall levels of activity, suggesting a pace of economic growth close to 3%.
• Federal Reserve policymakers shifting emphasis?: While the dovish Minneapolis Federal Reserve bank president Narayana Kocherlakota remains a strong voice against tighter policy, others are beginning to shift their rhetoric. Notably, the president of the St Louis Federal Reserve Bank, James Bullard, who had only a few weeks ago suggested further monetary stimulus, is now saying ending quantitative easing had been the right policy. Hawks such as the president of the Dallas Federal Reserve Bank, Richard Fisher, are now pressing their case for monetary tightening more confidently, warning — quite rightly, in our view — that the Federal Reserve would be mistaken if it chose to wait until the economy was at full employment before raising interest rates.
Implications for Asia: short term negative; key change we need to see is capital expenditure pickup in US
First, financial turbulence could hit the Asian bond, equity and foreign currency markets. If the US economy continues to gather momentum, as we believe, global investors will soon become much more nervous about a faster-than-expected pace of Federal Reserve monetary tightening. The 10-year US bond yield, still below 2.4%, a level that clearly does not price that in, is at risk of a sharp rise back to the near 3% level of 10 months ago. In that eventuality, an abrupt withdrawal of portfolio capital from emerging markets would result, causing substantial corrections in Asian markets and currencies.
Second, the benefits of a strong US recovery may take time to materialise for Asia. So far, the US recovery has only fitfully improved Asian exports. What has been missing in the US recovery so far is a stronger pickup in capital spending. Our analysis shows that capital spending in the US is key to demand for Asian exports, especially for Singapore, Malaysia and Taiwan. So, while a stronger US recovery helps support growth in Japan and Europe, and so helps stabilise global demand for Asia, the real US boost to Asian exports may take some time to show up.
In short, whether it is the bad news in politics of a weaker Obama or the good news of an accelerating US economy, the impact on Asia is not likely to be positive, at least in the near term.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
This article first appeared in Forum, The Edge Malaysia Weekly, on November 17 - 23, 2014.