rob subbaraman

After a turbulent 2016, optimism is in the air and financial markets are positioned for the prospect of higher global growth and inflation. Although the latest surge in populism – Trump’s election – win and Brexit – has startled investors, the fallout from the shock has (so far) been much less than predicted. Even China – many economists questioned its ability to rebalance its economy at the beginning of 2016 – has managed to stabilised growth via fiscal stimulus.

However, the conjectural confidence in the market is – ironically – happening at a time when the uncertainty over the outlook of the world’s economy is probably at its most extreme in decades.

At the risk of oversimplification, we considered four possible outcomes for the world economy this year and the implications for Asia’s economies:

Higher growth / higher inflation

• Trump is able to push through large fiscal stimulus in H1

• Global fiscal stimulus reinvigorates global private investment

• Higher growth lifts commodity prices and CPI inflation higher, leading to at least three Fed hikes in 2017 and further USD appreciation

• The US trade deficit increases in H2 and tighter financial conditions slow down US growth, fuelling US protectionism

Implications for Asia: Positive growth in Q1and perhaps Q2 as Asia’s export recovery continues. However, since Asia’s export-orientated and debt-loaded economies are very exposed to Fed hikes, US trade protectionism and China risks, the economic upswing does not last.

More resilient:  India

More vulnerable: Hong Kong

Higher growth / low inflation

• Quick step-up in global fiscal stimulus; however, higher commodity prices and core inflation remains benign

• The US follows Japan’s experience of low unemployment and low wage increase while global disinflationary forces take hold

• The Fed still hikes twice to reload its ammunition for the next US downturn

• With inflation staying low, trade deficit widens fuelling more extreme US protectionism in H2

Implications for Asia: Continued export recovery and a less aggressive Fed is more positive for Asia’s growth However, eventually more intense US trade protectionism kicks in leading to a downturn in Asia’s growth in H2.

More resilient:  India, Indonesia and the Philippines

More vulnerable: Hong Kong, Singapore, Malaysia and Korea

Low growth / low inflation

• Fiscal conservatives in the Republican Party delay the implementation of fiscal stimulus until H2

• Growth turns out to be on the low side as higher income earners save their tax benefits and financial conditions tighten due to rise in UST yields and USD appreciation

• Business and consumer confidence fails to translate into increased spending, as the private sector holds back

• Lower growth and a fall in commodity prices compound the issue and inflation stays low

• The Fed hikes at most only once in 2017and USD depreciates later in the year

• Even with a narrowing US trade deficit, the low growth emboldens the US to promote economic nationalism and push through “America First” policies, earlier than in either of the first two scenarios.

Implications for Asia: The export recovery fizzles out fairly quickly, probably in Q1, ending any hopes of a durable growth upswing. However, with limited Fed rate hikes, the risk of a corporate credit crunch is reduced, but the combination of low US growth, USD depreciation and trade protectionism leads to a more marked export downturn, with domestic demand holding up relatively better.

More resilient:  India, Indonesia and the Philippines

More vulnerable: Hong Kong, Singapore, Malaysia and Korea

Low growth / higher inflation

• Growth in the US turns out to be slower than expected

• Global downside risks crystalize with a China crash and euro-disintegration rekindling

• Widespread rise in economic nationalism spills over into increased geopolitical tensions, notably between the US and China

• Disruptions to global trade cause supply shortages, a surge in commodity prices and cost-push inflation

• Even with low growth, the Fed still hikes once

Implications for Asia: This would unambiguously be the worst outcome for Asia’s economies with a high likelihood of recessions and financial crises.

No economy would be unscathed.

Conclusion: There is almost an infinite combination of drivers to result in any of these four outcomes; however, it’s safe to say there is a high likelihood that Asia’s export-orientated and debt-loaded economies would suffer a setback sooner or later this year. Hold on to your seats - 2017 is going to be a roller coaster ride!


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