Deep into the most economically uncertain period in a generation, the economies of developing Asia are proving themselves to be robust.
As the US-China trade war rages, the region is still expected to grow at 6% this year, even if there are dark clouds on the horizon.
The Asian Development Bank (ADB)’s chief economist Yasuyuki Sawada has shaved 0.1% off his regional growth projection for next year, but his updated outlook for emerging Asia speaks of confidence in the underlying strength.
Healthy domestic demand has helped Asian economies ride out the opening exchanges of what now looks likely to be a long-term tariff war. These tariffs have yet to have any significant material impact on growth in emerging Asia. However, Sawada warns that further escalation could see this situation change.
The latest exchange saw the US levy 10% tariff on US$200bn of Chinese imports, to be raised to 25% by January 2019. China responded with a 10% tariff on US$60bn of US goods. Both sides are tightening investment restrictions and these may combine to exert “moderate impact” on developing Asia.
“However, any further escalation, such as 25% tariffs on all bilateral trade between the US and China, would have greater consequences,” Sawada warns, stating that China could lose 1% of GDP, with the US losing 0.2%.
The longer the trade war goes on, obviously the greater the impact it will have. Many have spoken about the potential shift in production and supply chains. Medium-term, it’s anticipated that the shift out of China due to higher labour costs will be accelerated due to the increased uncertainty of doing business there.
“The indirect fallout will be large for many economies in the region and globally, especially if automobiles and other parts become embroiled in the trade conflict. Estimates of impacts do not fully capture possible disruption to production units as overseas business networks are severed and investment plans are cancelled amid a reallocation of global production, nor do they gauge the negative impact of heightened economic uncertainty more generally. Such disruptions could be substantial as the conflict drags on, escalates, or spills over into financial markets,” says Sawada.
His view echo those of many in the trade industry: while the impact has been minimal to date, people are beginning to fear the worst. As GTR reported last week, bankers are now looking at reduced deal flow, while traders are starting to plan for long-term shifts in trade flows. If trade is impeded, then emerging Asia can expect growth in inflation, due to food and energy shortages.
For China, the ADB has downgraded its growth outlook for next year from 6.4% to 6.3%, but it has not changed its initial forecast of 6.6% of this year.
India, meanwhile, continues to be among the most strongly performing countries in the region. Spurred by robust domestic demand and growing exports, particularly in manufacturing, the ADB is predicting 7.3% growth this year and 7.6% next year.