Emerging Asia still drives global growth
Despite geopolitical woes and market instability
IT’S the time of International Monetary Fund (IMF)/World Bank meetings – in exotic Bali!
Unfolding against the backdrop of rising trade barriers and a reversal of capital flows to the developing world, amid higher geopolitical risks, weighed down by instabilities in emerging market economies (EMEs). IMF’s October 2018 World Economic Outlook lowered its global GDP forecasts – down to 3.7% for this year and next (from 3.9% in April).
The US is doing fine. So is Germany, whose economy accelerated in the second quarter (2Q18) helping lift growth in eurozone. But global trade tensions and a spiralling currency crisis – lately in Turkey, are clouding the outlook for businesses. As the economic weather begins to change with US tariffs having attracted reciprocal duties in retaliation, political risks are being built up with the threat from evolving financial crises being ever present.
There remain pockets of instability – Venezuela, Argentina, Turkey and now, Pakistan. Still, emerging Asia is showing persistent strength, expanding at close-on three times the pace advanced nations grow. Indeed, EMEs in Asia are expected to drive the forward outlook ( see table 1).
Asia
Within emerging Asia, most nations are performing well ( see table 2).
Emerging Asia continued to register strong growth, supported by a domestic demand-led pickup in the Indian economy from a four-year-low pace in 2017, even as Chinese activity moderated in 2Q18 in response to regulatory tightening of property and non-bank financial intermediation.
Higher oil prices lifted growth among fuel-exporting economies in Africa and the Middle East. Recovery in Latin America continued, but at a more subdued pace than anticipated, as tighter financial conditions and a drought weighed on growth in Argentina and a nationwide truckers’ strike disrupted production in Brazil.
Structural reforms in Asia remain essential to raising growth potential and spreading its benefits more widely, including through streamlining regulations and enhancing competitiveness, investing in infrastructure and human capital, and raising labour productivity.
Despite emphasis in China on the quality of growth rather than its speed, tensions persist between stated development goals and intentions to reduce leverage and allow market forces to play a larger role in the economy. An overarching priority remains to continue with reforms, even as the economy slows down, and to avoid a return to credit and investment-driven stimulus.
Key elements of the reform agenda include strengthening financial regulation to rein in the rapid increase in household debt; deepening fiscal structural reforms to foster better rebalancing; tackling income inequality by removing barriers to labour mobility, more decisively reforming state-owned enterprises; and fostering further market liberalisation, particularly in services.
In India, important reforms have been implemented in recent years, including the Goods and Services Tax, the inflation-targeting framework, Insolvency and Bankruptcy Code, and steps to liberalise foreign investment making it easier to do business.
Looking ahead, renewed impetus to reform labour and land markets, along with further improvements to the business climate, are also crucial. In Indonesia, the priorities are to enhance infrastructure, streamline regulations to boost competition, improve education quality, and ease labour market regulation to support employment.
Thailand – next Japan?
Thailand today is a far cry from 20 years ago when it was the most torrid of EMEs. Growth has since slackened; private investment expanded by only 1.7% last year. Thailand’s sovereign bonds yield less than America’s. Inflation is once again a worry, simply because it is so stubbornly low.
Consumer prices rose by only 0.8% in March. Inflation has remained below Bank of Thailand’s (BoT) target range of 1%-4% for 13 months in a row. Core inflation, excluding raw food and energy, has been below 1% for almost three years. Is Thailand the next Japan? It’s got Japan’s demographics from 25 years ago, and appears to be on the Japanese path of zero inflation, very low interest rates and a big current-account surplus.
By 2022, Thailand will be the first developing country to become an “aged” society, with more than 14% of its population over 65. The proportion of elderly is rising faster in Thailand than in China. Thailand’s demography should impart a sense of economic urgency. It needs to invest in infrastructure and machinery to ensure that tomorrow’s smaller workforce is well equipped to provide for a growing population of retirees.
Unfortunately, Thailand’s economic policy makers also exhibit some of the macroeconomic passivity that once paralysed Japan. The BoT has not cut interest rates since April 2015.This conservatism runs deep. Thailand needs to rely on more expansive fiscal policy. Unfortunately, public investment, which shrank by 1.2% last year, has been beset by backtracking and delays. Only in December did workers break ground on a long-awaited high-speed rail project linking Thailand, Laos and China.
Thailand is also moving a little closer to Japan in its growing antipathy to immigration. The government last year imposed tough penalties on illegal migrants, many from Vietnam and Myanmar, who are viewed as stealing jobs, not rejuvenating an ageing workforce. Thailand, however, is keener to import spenders. Receipts from foreign tourists rose by 11.7% in 2017, boosting growth against a backdrop of weak domestic demand. Welcome Thaifuji!
What then are we to do?
Given global uncertainties, it is not difficult to think of ways that things can soon go wrong. America’s stock market is pricey. Its economy has enjoyed a long expansion. Perhaps, the Federal Reserve may tip it into recession.
The trouble in EMEs could worsen. The eurozone is accident-prone. It still lacks a shared mechanism for propping up the economy by fiscal means.
Meanwhile, China’s economy has slowed. Its debt mountain looms large. President Trump’s multiple trade wars present another threat. Lest we forget, the Fed’s interest rate cuts following the past East Asian and Russian crises helped blow up the dotcom bubble.
When that burst, the Fed slashed interest rates and fuelled a housing boom and bust that did-in Lehman Brothers. There is good reason to worry that the end of quantitative easing or QE in Europe, and its reversal in America, will unsettle financial markets.
Met up with Marty [my old professor Martin Feldstein ( pic) ] on a recent visit back to Harvard. I still rate him as one of the world’s best macroeconomists – and was a fantastic teacher. He now thinks another recession is looming: “This means a downturn brought on in the next few years by rising longterm interest rates would likely be deeper and longer than your average recession. Unfortunately, there’s nothing at this point that the Federal Reserve or any other government actor can do to prevent that from happening.”
This is so because: “The principal risk now is that a stock market slowdown could shrink consumer spending enough to push the economy into recession.”
He continues: “As short and longterm interest rates normalise, equity prices are also likely to return to historic price-to-earnings (P/E) ratios. If the P/E ratio of the S&P 500 regresses to its historic average, 40% below today’s level, US$10 trillion of household wealth would be wiped out. The past relationship between household wealth and consumer spending suggests such a decline would reduce annual spending by about US$400bil, shrinking gross domestic product by 2%. Add in the effects on business investment, and this spending crunch would push the economy into recession.” This is a credible assessment. So, watch out!
However, the possibility that markets might be surprised by good news may seem absurd. It is natural to respond to trauma with caution. But this caution can be so extreme that it impairs people’s judgment.
Outbreaks often follow a big disruption of some kind – a plague, a famine or even a sharp increase in prices. Prophets of doom tend to spring up after disasters. When you have just lived through one trauma, another seems more plausible. Still, prophets of doom know they will eventually be proved right. It is the nature of business cycles that recessions happen.
Ironically, the threat of a trade war has reduced the likelihood of global recession. It has since purred the Chinese authorities to stimulate the economy sooner than they would have otherwise. Excepting the likes of Turkey, Argentina, Venezuela and Pakistan, few economic policymakers are making obvious howling errors at the moment.
Monetary policy in the advanced nations is more or less where they want it to be. Even Trump’s misguided trade war has not yet had serious macroeconomic impact. But unknown risks lurk in this apparently benign environment.
When the next crisis does come, the real problem is less likely to be mistakes in reacting to it than the failure to have design tools to prevent it arising in the first place.
Former banker, Harvard educated economist and British Chartered Scientist, Tan Sri Lin See-Yan is the author of The Global Economy in Turbulent Times (Wiley, 2015) and Turbulence in Trying Times (Pearson, 2017). Feedback is most welcome.