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Five strong drivers of growth could produce a reasonably upbeat outcome for Asian economies in 2020, provided that several downside risks are contained.
As we look forward to 2020, there is much pessimism in the air. This is understandable in view of the many downside risks that exist. However, while acknowledging what can go wrong, our view is that there are some strong drivers of growth that could mitigate these risks and hence produce a reasonably upbeat outcome for Asian economies next year. As we describe in our full Voice of Asia 2020 report, we see five main factors that support this view:
First, some of the factors that depressed the demand for the region’s exports this year are on course to be reversed, at least by enough to allow a modest rebound in 2020. Policy support in the large developed economies is expanding. Global monetary conditions have eased, with the US Federal Reserve Bank and the European Central Bank cutting rates and providing greater liquidity support. Japan is implementing a massive 26 trillion yen stimulus package.
Even more positive for Asia is the increasing evidence of a Chinese economic rebound, as shown in purchasing manager surveys of both the manufacturing and non-manufacturing sectors. Moreover, one-off factors in the automobile and aviation sectors that contributed to the global slowdown show signs of reversing. And, finally, there are also signs of an uptick in the electronics cycle, which is a major factor driving exports in Asia. Semiconductor billings are growing again after more than a year of decline, while the inventory drawdown appears to have run its course.
Second, an interim trade deal between the United States and China has eventually materialized. A “phase one” trade deal was being reached on December 13, 2019. These talks have been difficult, but we believe that there is a strong incentive for both sides to cut a deal that will take care of the less contentious points of dispute between the two big powers. Both sides need a deal that would stabilize business confidence and maintain growth. While such a deal will not resolve all the differences between the two, a deal will shift the focus of contention from trade, which has direct and material economic impact on growth, to other areas such as technology, investments, and visas where the economic damage is more indirect and could be mitigated by loopholes and corporate lobbying.
Third, Asian policymakers are putting in place pro-growth policies that will generate domestic sources of growth such as stepped-up infrastructure spending and more efforts to improve the business ecosystem. Since the middle of 2019, a clear commitment by the systemically important central banks to ease monetary policies has given more room for Southeast Asian central banks to ease monetary policy. As a result, Southeast Asian central banks have cut their policy rates and eased monetary conditions through other means such as reductions in reserve requirements.
Additionally, an increasingly important thrust of Asian policy is the greater effort being made to sustain trade integration in order to build buffers against growing protectionism. First, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which came into force at the end of December 2018, is now being implemented. And second, an agreement was reached to establish the Regional Comprehensive Economic Partnership (RCEP), which aims to harmonize existing trade pacts in Asia.
Fourth, production relocation out of China to Southeast Asia will pick up, adding a powerful engine of growth to the region. Both foreign investors as well as Chinese manufacturers are finding it expedient to move certain types of production elsewhere. Where continued offshoring—locating production in a low-cost production base—is the chosen strategy, it is clear that Southeast Asian economies are the major beneficiaries, with Mexico gaining to some extent as well.
China is not necessarily a big loser from this process. A recent survey by the American Chamber of Commerce in China found that few of its members who produce in China for the local market—the majority of its survey respondents—intend to move. That said, many companies that produce in China for export to the United States or other countries are among those considering a move. Our view is that firms producing in China that depend on inputs of American technology or software may find it necessary to shift production to another country with a better relationship with the United States.
Fifth, the Asian consuming classes will continue to expand, adding more demand and business opportunities. Stability in the labor market as well as remittance inflows from overseas workers are increasing household incomes across the region. Moreover, the sustained easing of monetary conditions through rate cuts will also help lift consumer spending.
Despite these signals, the cyclical uptick we foresee in 2020 hinges on several downside risks being contained:
First, Chinese policymakers could overreact with excessive stimulus, which could set off yet another boom-bust cycle. Some observers have raised a concern that Chinese policymakers may overreach in terms of the scale of policy stimulus, particularly the use of credit to stoke growth. Others have pointed to past instances where infrastructure was built with no possibility of being heavily utilized for years. However, the pattern of policy responses in this cycle provides grounds for believing that the Chinese policy response this time will be more nuanced and calibrated.
Second, in the United States, the November 2020 presidential elections could result in erratic policies that could prove destabilizing. The greatest threat to our baseline scenario is a breakdown in the US-China trade talks, which could precipitate an escalating series of tit-for-tat trade restrictions. This would undermine business confidence around the world and in Asia, causing economic growth to slow.
Third, global financial risks remain salient. Institutions such as the Bank for International Settlements (BIS) have been warning of the potential downsides from quantitative easing, as corporate and other debt grows rapidly. The BIS has pointed out the role of excessively leveraged hedge funds in compounding the turbulence in the repo market. The BIS and other authorities have also pointed to other risks in the financial sector such as the growth of the leveraged loan market, which has reached US$3 trillion in size. Additionally, they have warned that credit standards have been deteriorating, as investors desperately searching for yield have supported the emergence of potentially risky financial products such as collateralized loan obligations (CLOs).
To learn more and to read our analysis of the outlook for specific Asia-Pacific countries, download the full report, Five themes that will drive Asian growth in 2020: Deloitte Voice of Asia 2020.