The U.S.-China trade spat is not the only headwind for Asia, with analysts warning of a looming slowdown ahead for the world’s most economically dynamic region. Can Asia ride out the storm?
In the latest escalation, U.S. President Donald Trump rattled already nervous financial markets by threatening to impose tariffs on up to $500 billion worth of Chinese imports.
“We’re down a tremendous amount,” Trump said Friday in an interview with CNBC. “I’m ready to go to 500.”
“I’m not doing this for politics, I’m doing this to do the right thing for our country,” he added. “We have been ripped off by China for a long time.”
Trump’s move sent U.S. stocks and the dollar lower, also causing further falls on Asian markets including the Chinese yuan, which has dropped to a one-year low against the dollar.
The price of copper, considered a bellwether for global growth, also fell to a one-year low on worries that the U.S.-China trade row could dampen demand for industrial metals.
Both the United States and China have already imposed $34 billion worth of new tariffs on each other’s imports in a tit-for-tat row that shows little sign of ending.
As previously noted by Pacific Money, Asia risks being caught in the crossfire in the battle between the world’s two largest economies. Hong Kong, Singapore, South Korea, and Taiwan are particularly exposed, along with economies such as Australia that have a large trade weighting toward China.
Every 10 percent drop in China’s exports could reduce the growth rate of Asian economies by an average of 1.1 percentage points, according to Bloomberg estimates.
Japan, Canada, and the European Union have also warned the Trump administration against its threat to impose tariffs of up to 25 percent on auto imports.
Such a tariff hike could push Japan into recession, warns WisdomTree Japan’s Jesper Koll. The Tokyo-based economist said the world’s third-largest economy could see gross domestic product (GDP) drop by up to 0.8 percent, with listed companies’ profits falling by 13 percent.
Ultimately, a full-blown trade war could plunge the world economy into recession, analyst Gary Hufbauer of the Peterson Institute for International Economics told The Diplomat.
Growth Slump
Amid such worries, analysts have pointed to other headwinds that could further cloud the outlook.
In a July 20 report, Capital Economics warned: “Worries about a global trade war have already weighed on the prices of many risky assets, particularly those in Asia. And there is a growing risk that the U.S. implements even more protectionist measures than it has threatened so far.
“Even if this does not happen, though, there are reasons to be pessimistic about the outlook. Regardless of U.S. trade policy, we forecast that China’s economy will lose steam over the rest of this year, and that the U.S. economy will slow sharply in 2019. This is reflected in our forecasts that equities will fall a long way and that credit spreads will rise significantly around the world between now and the end of next year.”
The London-based consultancy sees world GDP growth contracting from 4 percent in 2018 to 3.7 percent next year and 3.2 percent by 2020. For Asia, China is seen slowing to just 4.5 percent GDP growth in 2019 and 2020 compared to official estimates of 6.5 percent, while Japan could weaken to just 1 percent GDP growth in 2019 and 0.3 percent in 2020.
Emerging Asia would also be hit, dropping from an estimated 5.5 percent GDP growth in 2018 to 5 percent next year and 4.5 percent in 2020.
Capital Economics blames the cumulative effect of U.S. interest rate increases, which will weigh on the world’s biggest economy, along with capacity constraints in the Eurozone and Japan, with the latter facing a sales tax hike in October 2019.
It also points to surveys showing a sharp slowdown in trade growth on the back of recent protectionist measures. However, even in the “extreme scenario” of 25 percent global tariffs on all goods trade, it sees global growth as only dropping by 2 to 3 percentage points, avoiding a world recession.
“Nonetheless, if trade tensions do escalate they could have a big effect on the financial markets,” it said.
Capital Economics sees the benchmark U.S. S&P 500 index falling to 2,300 by the end of 2019, down from Friday’s close at 2,801, with weaker U.S. stocks pushing down other stockmarkets in Asia and elsewhere.
Already, the MSCI Emerging Markets Index has dropped by around 5 percent in local currency terms since April 27 and could fall further in the year ahead amid a slowing Chinese economy, with similar declines in emerging market currencies, including China and Thailand.
‘Late Cycle’
Adding to the downward risks, ANZ Research has suggested that the recent volatility in Asian financial markets “stretches beyond escalating trade tensions.”
“We believe that the maturing of the region’s economic cycle and rising growth differentials with the U.S. have also become critical headwinds,” Sanjay Mathur, chief economist for Southeast Asia and India, said in a July 12 report.
“Various incoming economic data validate our view that the transition of the regional business cycle is moving into a ‘late’ stage. While a late cycle does not in any way portend an imminent collapse in growth, sluggish or fading momentum at a time when it is strengthening in the U.S. has accentuated financial market volatility.”
Mathur points to weakening export sentiment data in China, Indonesia, and Malaysia, along with actual declines in South Korea and Taiwan for June. Corporate sales and profits have also moderated, adding to ANZ Research’s view of a maturing economic cycle.
For Asian central banks, “with the shield provided by strong growth fading, the degree of freedom available to simultaneously pursue an independent monetary policy and ensure stable financial markets may be declining.”
In its latest “World Economic Outlook” report, the International Monetary Fund (IMF) projected global growth would remain high at 3.9 percent in 2018 and 2019, as per its April forecasts.
However, the Washington-based institution noted “the balance of risks has shifted further to the downside, including in the short term.”
“The recently announced and anticipated tariff increases by the United States and retaliatory measures by trading partners have increased the likelihood of escalating and sustained trade actions. These could derail the recovery and depress medium-term growth prospects, both through their direct impact on resource allocation and productivity and by raising uncertainty and taking a toll on investment,” the IMF said.
“Avoiding protectionist measures and finding a cooperative solution that promotes continued growth in goods and services trade remain essential to preserve the global expansion,” it added.
Another warning was provided Sunday by the G20 Meeting of Finance Ministers in Argentina, with the official communique pointing to “downside risks over the short and medium term” including “rising financial vulnerabilities, heightened trade and geopolitical tensions, global imbalances and inequality.”
It added: “Although many emerging market economies are now better prepared to adjust to changing external conditions, they still face challenges including market volatility and reversal of capital flows.”
With such warnings, will the Trump administration and Beijing step back from the brink and cut a deal that preserves global growth? The rest of Asia can only hope cooler heads prevail before the threats and counterthreats result in long-lasting economic damage.