This article first appeared in Forum, The Edge Malaysia Weekly on June 10, 2019 - June 16, 2019
The gods have been conspiring against the world economy, where nothing seems to be going right. Economic activity is losing vitality virtually everywhere — even the seemingly unstoppable US economy is slowing. Tensions between the US and China are escalating. And this has not stopped the US from ramping up trade aggression even against friendly nations such as Malaysia and Singapore or potential strategic allies such as India.
How bad will things get and what will the impact be on regional economies?
In short, our view is that economic conditions are likely to deteriorate further. Financial markets seem to think that monetary easing will prevent the slowdown from turning into a downward spiral. That could be true but only up to a point. There are some fundamental unknowns — how the US and China conduct their relations, how convinced businesses across the globe are that the downside risks can be contained, and whether the slower global economy might trigger financial imbalances in China and elsewhere. Until there is clarity on these factors, the downside risks will grow.
What has gone wrong?
The news in the past two weeks has been unremittingly depressing:
Fundamentals are against us – near-term prospects are therefore worrying
To fully understand how things are moving, we need to go beyond these details and appreciate the geopolitical context in which they are unfolding.
Our deepening pessimism stems from the realisation that we are living in a world where three big powers — the US, China and Russia — are vandalising the diplomatic, security and trade frameworks that helped preserve political stability and allowed the Asia-Pacific economies to flourish. This sounds like a strong statement to make, but it is not an exaggeration. The current US administration has broken basic norms of diplomatic conduct and has few qualms about undermining vitally important international frameworks such as the World Trade Organization’s dispute settlement mechanism. China is not innocent either — witness its occupation of disputed territories in the South China Sea, its refusal to accept the findings of the International Tribunal for the Law of the Sea, its efforts to force technology transfer from foreign companies to local ones and its intimidation tactics against countries that annoyed it. Russia’s interventions in Georgia in 2008 and Ukraine in 2014 did not do the global order any favours either.
And this is why, although there are some offsetting trends, they are not enough for us to be confident of future prospects. Yes, financial conditions have loosened for the developed economies — for example, 10-year US bond yields have fallen sharply, from 2.55% at the beginning of May to 2.13% last week. Falling borrowing costs should help firms and consumers while also probably boosting housing demand. And, yes, another positive has been the correction in oil prices, which have fallen by around 15% since early May. But, these changes are unfortunately, too modest to affect the overall picture of a downward drift in global prospects. Financial markets are, therefore, celebrating these positives too prematurely.
What should we expect in the coming weeks and months?
What can Southeast Asia do?
This region is highly dependent on the world economy, whether it is through exports, commodity prices, tourist arrivals or capital inflows, to finance current account deficits or the foreign direct investment that is essential to economic development. As the global economy deteriorates, the downward pressures will build on regional economies.
At one level, we need more proactive domestic counter-cyclical policies. In the past year, the emphasis was more on stability rather than preserving growth. For instance, Bank Indonesia raised interest rates aggressively to protect its currency even at the risk of slowing the economy. Similarly, for the Philippines. That was the right thing to do then. But now, with the headwinds growing, the priority needs to shift to preserving growth by easing both monetary and fiscal policies.
Beyond such immediate responses, there is also a need for more strategic, long-term responses to prepare the regional economies to face down what could be a permanently stressed global economy. Domestically, this means stepping up infrastructure spending to boost demand and reduce a constraint on competitiveness. There should also be more reforms of the supply side of the economy. For instance, if Indonesia deregulated its labour market rules to make them more investor-friendly, that would attract a lot more foreign investment in export-oriented manufacturing, which Indonesia needs.
But we also need a more coordinated regional response:
• Finally, at a time when globalisation is in retreat, there is an even more pressing need to reinvigorate Asean economic integration. While initiatives such as the Asean Economic Community have made some progress, it falls far short of the integration needed to offset the slower growth of world trade and investment.
The bottom line — the region is facing a much more troubled world and it needs to step up its adjustment to that reality.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
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