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Global Economic Challenges and Asia

As we see this year, 2020, as shaping up to be quite a challenging one for Asia. Economic growth is certainly holding up pretty well so far, but we don’t think the region is going to escape entirely unscathed from the slowdown already underway in the United States and, to a lesser extent, in Europe. Already we are seeing exports to the United States and the European Union, and electronic exports in general, beginning to slow. So far this has been broadly offset by strong exports to Latin America and the Middle East as many countries in those regions continue to benefit from high global commodity prices. Also around the region we’re seeing that retail sales volume is declining somewhat, while industrial production and consumer confidence have started to ease, at least in parts of the region. On the financial side, while the exposure of Asian financial institutions to structured products and the supreme market in particular, is low, the region has not been immune to the turbulence that we have seen in global financial markets that began last summer.

While there are no signs as yet of any significant credit squeeze in the region, equity markets are down substantially, and that has had implications for the ability of corporate to raise capital through IPO’s, notably in India, and credit spreads for banks and corporate have increased significantly. At the same time as we’re seeing signs that growth is starting to slow, inflation is rising significantly across the region.

Now, this increase initially reflected spikes in food and commodity prices, and those pushed up headline inflation numbers, and that is something that is likely to be bolstered by the recent increases in rice prices that we have been seeing, and prices there have reached ten-year highs. However, what we’re also seeing is that second-round effects, I think, are starting to kick in a number of countries, reflecting the fact that domestic demand has been still pretty strong in many countries, and we’re seeing that core inflation is starting to pick up, quite significantly in fact in a number of countries such as Indonesia, India, and Vietnam, and others too.

At the same time, we’re seeing producer price inflation is now rising quite rapidly across many countries in the region, and those points to a compression of profit margins and the possibility of further inflationary pressure ahead. So, inflation is becoming quite a significant issue around the region, I think. Now, turning for a moment to our growth projections, and I’ll come to a qualifier in a second, we’ve been forecasting that growth in emerging Asia is going to slow from about 9.2 percent last year to a little over 7.5 percent this year, before picking up next year. And in particular, growth in China is projected to decline by about 2 percentage points this year, mainly as a result of slowing exports as we envisage it.

Now, I should note these projections don’t take into account the upward revision to 2020 growth in China that was made yesterday. Figures were revised up from 11.4 to 11.9 percent, by about half a percentage point. I don’t think that is going to change the overall picture. We still envisage a slowdown of a similar magnitude in China, and across the region, but it will change the levels a little bit. Obviously for 2020, but there will be some carryover effects for 2020. We’re still looking at the latest revisions and those are not fully incorporated into our projections.

Elsewhere in the region we also see India’s economy as cooling this year, particularly as lower investment brings down growth a bit and we see that coming down right now to just a little bit below 8 percent. We also see economies with large trade and financial exposure to the United States and Europe, such as Singapore and Hong Kong SAR, seeing significant declines in growth this year, notwithstanding in Singapore’s case the strong numbers for the first quarter that came in, I think, yesterday. But, they were broadly in line with our quarterly path that we had in mind. Turning to industrial Asia, growth is forecast there to slow by about half a percentage point to 1.7 percent in 2020, with growth in Japan slowing from 2.1 percent last year to 1.4 percent this year, and picking up a little bit next year.

So, the overall outlook for Asia, despite this slowdown, remains quite favourable, but I think the risks, as elsewhere, are tilted still to the downside. The main concern here is I think that a further deterioration in financial market conditions in advanced economies could occur, and that would have further implications for Asia. I think while the impact on the region’s exports from a further decrease in foreign demand arising from such a shock would likely be sizable, I think the financial transmission channel, which admittedly is quite complex and somewhat harder to predict, could also be significant. That could potentially include confidence and balance sheets effects as well as volatility in capital flows to countries around the region. Turning to some policy implications, the rising inflation that I mentioned around the region will constrain the extent to which I think macroeconomic policies, especially monetary policy, can be eased, certainly under our baseline scenario. Indeed, I think in a number of economies around the region, restraining inflation should be a priority at the moment. But in the event that we do see a sharper slowdown in the global economy than we’re envisaging and sharper slowdown in the region, inflation pressures generally in the region should start to abate, including, I think, with that sharper slowdown leading commodity prices globally to ease, and that would provide some further room for countercyclical policies in many countries. In that connection, I would note that a lot of countries around the region have in recent years strengthened their public finances, and that has created some fiscal space for countercyclical fiscal policy, if it is needed. I would also note, just returning to the inflation front, that greater exchange rate flexibility in a number of cases would provide policy makers with more monetary policy independence. And certainly in those countries where we are seeing pressures on the local currency on the strong side, particularly China, further appreciation would help dampen the inflationary pressures that we’re seeing there through lower import prices, and would also help to rebalance growth in a way that is favourable for China in the long run, and helpful for the global economy. Still on the policy side, given the sort of risks that we are seeing in global financial markets, I think monetary and regulatory authorities around the region need to monitor financial institutions and financial markets carefully, and think about how they would cope with further pressures there. That includes reviewing contingency plans for dealing with financial stress, including mechanisms for providing liquidity and for bank capitalization. Over the medium term they need to review their regulatory and supervisory frameworks in light of the lessons that are being learned everywhere from the current turmoil.

As I mentioned earlier, a central issue here is the question of the extent to which Asia can decline from the rest of the economy in the current economic circumstances, and we do have a chapter in the REO that goes into this issue in some detail. I think the findings there are quite interesting. I think we actually find that trade and financial linkages between Asia’s emerging markets and the United States and Europe have in fact been increasing in recent years, if you look at them in relation to GDP in particular, even as interregional trade has been growing, and even as exports to non-traditional markets have been increasing, too. Reflecting these deeper linkages, we see the correlations, in fact, between growth in Asia and that of the United States has been rising, as well as correlations between Asian financial markets and U.S. financial marks. And we see these correlations, not surprisingly, as being highest for the countries with the deepest trade and financial linkages with the United States. So, the bottom line in all this is that while spillages from the United States to Asia have on average been relatively modest—historically we came up with a relationship something like a 1 percent slowdown in the U.S. has a quarter to half a percentage point impact on growth in Asia, varying across countries—those linkages have become stronger. And in particular, financial linkages we found have become more important for the transmission of shocks, suggesting this channel could be important going forward.

So, the bottom line here is that while Asia maintains good growth momentum at this point, it is unlikely to decline entirely from the current slowdown, and it is going to feel the effects, although because of the strengthening of policy frameworks in recent years, it is going to be well-placed to weather these spillages.

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