After nearly two years of an upcycle, signs are building that growth in Asia ex-Japan (AEJ) may be starting to roll over. The PMIs portend a mixed bag in June, but an ominous sign is that export orders fell in six countries. The question therefore, is by how much Asian growth will slow down and why. We highlight six reasons for this phenomenon.
1. Global growth deceleration
The annual pace of global GDP growth has peaked and a phase of deceleration is expected to lie ahead. From a peak of 4% year-on-year in Q4 2017, there could be a cyclical slowdown to 3.5% by Q4 2018 and to 3.1% by Q4 2019, weakening world trade volume growth. Moreover, a resilient US economy is unlikely to offset headwinds affecting AEJ. Asia’s domestic financial conditions are also starting to tighten with interest rates rising in India, Indonesia and the Philippines and the higher costs of financing in corporate debt markets in China could soon spread to other countries.
2. China slowdown
There was a recent slowdown in China’s fixed-asset investment growth, and due to the government’s regulatory changes on shadow banking and property market speculation, this is expected to continue. Externally, there are rising risks from a disruptive trade conflict.
3. Trade protectionism to hurt open economies
A continued rise in global trade protectionism will be more damaging to Asia’s export-oriented economies such as Singapore, Korea and Malaysia, which are large suppliers of high value-added parts and components to China for assembly and export. Another factor affecting trade is the broadening and escalating threats of tariff barriers, potentially postponing investments.
4. Global electronics cycle to turn down
Global semiconductor shipments have witnessed a solid, structural uptrend since 2016 due to Fourth Industrial Revolution-led demand from the cloud, artificial intelligence, cryptocurrency and autonomous drive spaces. Rising memory demand and consequent inflation has led to weaker demand for end-products like smartphones, which are likely to record their first ever year of demand contraction in 2018. Second, higher memory prices have stoked more capex, which could eventually lead to lower memory prices. Thus, the moderation in price and volumes could slow the growth of electronics exports in coming years.
5. Tighter financial conditions
The unwinding of quantitative easing, which is estimated to turn into quantitative tightening in Q4 poses a changing capital-flow backdrop, particularly for the twin deficit countries of India, Indonesia and the Philippines, all of which have responded with interest rate hikes and the potential to hike further this quarter. In addition, more challenging conditions to raise debt and equity can reduce investment and the negative impact on economies could be larger than in the past.
6. Rising oil prices are an adverse terms of trade shock
The surge in oil prices will affect most of Asia due to all of the countries in the region, barring Malaysia, being net oil importers. Thus, rising oil prices would crimp consumer discretionary demand due to lower real-income growth and slow business investment growth. This will be particularly difficult for current account-deficit economies such as India, Indonesia and the Philippines.
To conclude, while Asian growth has been quite resilient thus far, cracks are starting to appear. However, despite the setbacks such as the rise in oil prices, trade protectionism and Fed rate hikes, Asia has been shielded by solid exports and overall growth. Once these start to give way, Asia’s market risk premium will see a sharper rise.
For more insights on Asia’s growth slowdown in H2 2018, click here.
Head of Global Macro Research
Senior Economist Korea, Taiwan and Hong Kong
Chief China Economist
Chief Economist, India and Asia ex-Japan
Southeast Asia Economist
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