This article first appeared in Forum, The Edge Malaysia Weekly on November 11, 2019 - November 17, 2019
A quick scan of the headlines shows continued pessimism about the world economy. Respected international organisations such as the World Bank and the International Monetary Fund (IMF) have downgraded their forecasts for global growth and many institutions with super-duper forecasting models have also chimed in with downbeat prognostications. On the surface, this makes sense since the downside risks sound pretty intimidating: a nasty trade war, weaker momentum in some large economies such as the eurozone and China and some formidable geopolitical risks.
In response, we would say three things. First, there are convincing reasons for an upside surprise in economic growth around the world. Second, the recovery will be modest but still positive for all of us; however, the benefits for Asia in terms of stronger exports may take time to emerge. And so, third, Asian policymakers still have much work to do to support the region’s prospects — and in this respect, they are doing fairly well.
Five reasons the global economy could do better than expected
First, the US-China trade agreement that is close to being finalised will help alleviate business uncertainty, which has depressed economic activity all over the world. Sure, the deal is a “phase one” agreement that only partially resolves the many disagreements between the two big powers. But it is still important because it buys time for a broader agreement, reverses some of the tariff increases and reduces the chances of a downward spiral of trade retaliation. Yes, the US and China will continue to bicker in other areas such as technology and currency management, but these areas will not cause the immediate and significant economic damage that a trade war inflicts.
Second, more evidence is emerging that China’s economy is rebounding: Caixin’s Purchasing Managers’ Index, which is a better measure of the fortunes of the private sector than the official government PMI, rose to its highest level in nearly three years, bolstered by the first rise in new export orders in five months. The overall pipeline of new business is expanding at the fastest pace in nearly six years, which is why the survey’s measure of business optimism has soared to its highest level since April. This improvement reflects the success of the government’s targeted credit easing, which has channelled more loans to the credit-starved parts of the economy — the small and medium enterprises. The surge in approvals of large projects also means that infrastructure investment will recover vigorously in early 2020.
Third, there are signs, albeit tentative ones, that the electronics cycle is turning around. Worldwide semiconductor sales, which had been declining for a while, rose 3.4% month on month on Sept 19, after rising 2.5% in August. Recent data on Korean exports provided evidence of two hopeful signs: excess inventories of semiconductors are being managed down and demand is increasing across several areas — owing to the proliferation of US data centres, the rollout of 5G networks and improving demand in the mobile phone sector. The electronics sector is a major part of the economy across East Asia, so a turnaround will be a major positive for the region.
Fourth, the large economies are likely to do better than expected. Defying scare stories of a possible recession, the US labour market keeps going from strength to strength. Moreover, the US ISM Services PMI jumped to 54.7 in October from 52.6 in September. With both new orders and employment expanding healthily in this sector, which accounts for 80% of the US economy, it is set to grow in line with its potential rate in 2020. The eurozone economy is currently struggling, but the combination of a recovering Chinese economy, a more competitive euro, some relief that Brexit will not be as damaging as feared, easier monetary conditions and expectations of fiscal boosts should help it as we move into 2020. And in Japan, the economy is likely to bounce back from the severe weather and the rise in sales tax, which hurt activity last quarter. In fact, post-typhoon reconstruction spending will add to growth from early 2020 onwards.
Fifth, one-off factors that caused the auto and aviation sectors to wither in 2019 are likely to be reversed in 2020. The auto sector (which the IMF says accounts for 5.7% of global economic activity) has suffered a major slowdown for a variety of reasons, including regulatory changes in Europe, China and India. Some of this decline will be reversed in 2020. For example, in Europe, bottlenecks in meeting new emissions certifications that delayed the launch of new models are easing, which should enable production to recover early next year. A recovery in the aviation sector is a bit more uncertain — much depends on Boeing’s resolving its problems with the 737 Max airplane. If these issues can be overcome by early 2020, the aviation sector could also recover.
But will recovery translate into unalloyed positives for Asia?
A stabilising US economy and a revived Chinese one will help the region by promoting a recovery in global business confidence and supporting commodity prices.
But two further things are needed before Asia can truly benefit — and neither is yet in place: For one, the confidence recovery has to be big enough to unlock capital spending that has been frozen because of so much uncertainty over geopolitics and trade. Businesses continue to worry about hawks in the US promoting decoupling of the American and Chinese technology worlds, Brexit, how Hong Kong’s troubles might end, and geopolitical risks such as those in the Middle East. Given that these risks are not going away soon, it will take some months of visible economic recovery before companies feel secure enough to unfreeze their capital spending plans.
Another requirement is that the propensity to import in both the US and China needs to improve — but the PMI surveys show import orders actually weakening even as the PMI levels improved. Part of this reduced appetite for imports is structural: In China, for instance, domestic producers are now able to manufacture many of the industrial components that China’s East Asian neighbours used to produce for China.
A global recovery also means that major central banks have reached their point of maximum dovishness. From here onwards, we are unlikely to get much more monetary easing. For instance, in lowering its federal funds rate for the third time in 2019 to a target range of 1.5% to 1.75%, the US Federal Reserve signalled a likely end to its rate-cutting cycle. The European Central Bank under its new president is also likely to be more circumspect in pursuing further easing. As global investors realise this, there could be corrections in financial markets that could affect confidence in Asia.
What to expect from Asian policymakers then?
In other words, there is a rising chance of an uptick in the world economy, but it may not be strong enough to generate a turnaround in Asia’s economic fortunes. So, the region will have to depend on itself to ensure growth. The good news is that overall policy supports are well in place — essentially, efforts to provide buffers against global risks are being created.
First, monetary policy has been relaxed and fiscal policy is likely to be more supportive as well. There has been sustained monetary easing across the region, with almost all central banks cutting rates, or in Singapore’s case, slowing the pace of its currency appreciation. In several other countries such as Thailand and the Philippines, delays in passing budgetary bills in parliament have been overcome and fiscal spending is now likely to be ramped up.
Second, many more initiatives are being implemented that will stimulate growth: Ambitious infrastructure building programmes are being executed in Thailand, Malaysia, Indonesia and the Philippines. The region’s leaders are also pursuing vigorous programmes of supply side reforms to improve the business ecosystem. For example, President Joko Widodo has started his second term with a re-energised cabinet and indications of bureaucratic reforms and stepped-up efforts to improve the ease of doing business. In Thailand, a slew of measures is being put in place to attract manufacturers seeking production locations outside of China. In the Philippines, President Rodrigo Duterte’s economic team is pushing through more fiscal and other reforms.
Third, new trade agreements have been secured, which will help the region protect itself better against the rising tide of protectionism. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership is now being implemented. While several countries, including Malaysia, have not ratified the agreement yet, enough have to bring the CPTPP into effect. Vietnam will be a big winner from this.
Last week, the 10 Asean nations and several of their partners — China, Japan, South Korea, Australia and New Zealand — finally concluded negotiations on the Regional Comprehensive Economic Partnership agreement. The text of the agreement is now being vetted by each country’s legal authorities and should be ready for signing in early 2020. It was disappointing that India chose at the very last minute to pull out, but even without India, RCEP is substantial — covering 2.1 billion people and about a third of global economic output. The agreement will streamline Asean’s separate free trade agreements with those of the other partner nations, reduce tariffs, improve the process for trading across borders, set the stage for improving trade in services and introduce some regulations to better protect intellectual property. Although falling short of the more substantial changes that the CPTPP offers, there is enough in RCEP to help promote trade and encourage MNCs to locate production facilities to Asean.
But there are other encouraging dimensions to the RCEP agreement. At a time when very few multilateral trade agreements seem possible, Asean and its partners, especially Japan, have demonstrated that with the right political will, differences can be bridged and a win-win agreement achieved by countries that are extraordinarily diverse. Not only has Asean again showed up its detractors who have long claimed that it is just a talk shop, it has reclaimed its prized “centrality” at a time when Asean seemed to have lost its way. And by building this huge free trade area, it has provided its members with added protection against efforts by the US to pressure its trading partners into making one-sided concessions.
The bottom line
Without being complacent about the risks, we can be reasonably confident that the world economy, far from tumbling into a recession, is likely to regain momentum as we head into 2020. The recovery will be modest, so policy support will still be needed in Asia. Fortunately, that seems to be well understood and there is every reason to expect that monetary and fiscal stimulus will be implemented while supply-side reforms are likely to provide an additional boost to growth.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy
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