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Asia outlook improves, but are we ignoring geopolitical risks?

Asia / 27-09-17 / by
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The outlook for Asian growth has improved, with better than expected external demand leading the Asian Development Bank (ADB) to revise upwards its growth forecasts for this year and next.

At a press briefing in Hong Kong on Tuesday, the ADB’s chief economist Yasuyuki Sawada predicted that developing Asian GDP will grow by 5.9% this year and 5.8% in 2018. This is largely spurred by an improvement in the economic picture in China, where growth was also revised upwards. The ADB now predicts that China’s economy will grow by 6.7% this year, 0.2% stronger than its initial prediction.

“The Chinese economy remains resilient, solidifying its role as an engine of global growth. Supply-side reform is moving forward, but eventual success hinges on a careful balancing of the role of the market and the state, particularly as the country continues its transition to a more market and services-driven economy,” Sawada said.

However, amid the positivity, there was a glaring elephant in the room: how can anyone make concrete predictions at a time when geopolitical risk is so high? When asked by GTR if he included the risk of a trade war involving China, which would be hugely destructive to regional supply chains, Sawada said he didn’t.

“In this forecast we don’t consider potential US countervailing duties and sanctions on China’s trade and we believe it’s not necessarily a concern here. We predict our growth forecast of 5.8% this year to continue, along with better than expected global trade, based on not only US growth but also Europe and Japan growth,” he said.

He added: “Trade is a source of growth and economic resilience for Asia. The latest data show that trade volumes continue to grow. At the same time, intra-regional trade now stands at 60% of all trade in Asia. This dynamic helps ensure that the benefits of trade are both broad-based and subject to less volatility than in the past. Compared to its previous forecast, ADB has downgraded its risk assessment of any potential changes in trade policy impacting Asian economies.”

This is counter to the general mood on the ground in much of Asia: the risk of a trade war is a big concern and a huge talking point among traders and bankers.

The ADB growth projection is powered significantly by growth in the electronics and high-tech sectors. Consider the sprawling, hyper-connected nature of Southeast Asian supply chains, many of which feature China as the end buyer. Any sanctioning of China by the US would likely be hugely disruptive to these supply chains and have a massive impact on regional trade.

There is also the risk of conflict between the US and North Korea which, if it happens, would likely result in widespread destruction. Lawyers in Asia are regularly briefing clients on the changing situation regarding North Korean sanctions, while insurers are having large volumes of enquiries into their political risk policies.

Again, these do not feature in the ADB modelling.

“Like most other forecasters it does not include highly hypothetical geopolitical risks in our baseline projections. In general I can say the ADB will continue to work with our network to enhance co-operation across the region,” Sawada said when asked about the potential knock-on effect of the North Korean crisis on trade and commerce in the region.

These issues aside, the picture does look slightly better than six months ago. This positivity is reflected by an upward revision in trade growth forecast by the WTO. The organisation says that world trade is expected to grow 3.6% in 2017, well above last year’s lacklustre growth of 1.3%.

Not all forecasters agree on the recovery, however. This month’s CPB World Trade Monitor, a service provided by the Dutch government, says that global trade growth fell by 0.4% in July.

“In three-month average year-on-year terms, world trade grew at its fastest rate since 2011, but this was somewhat flattered by a low base for the year-on-year comparison in July 2016. In short, CPB data are showing some signs that the recovery in world trade maybe losing steam,” says Simon McAdam, global economist at Capital Economics, commenting on the release.

He adds: “The latest CPB data suggest that the recovery in world trade may have lost momentum. However, these data are at odds with a range of other, more upbeat indicators of global trade. And forward-looking business surveys point to growth in world trade volumes holding up well.”

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