(Dec 20): The past 12 months have been turbulent, marked by political and economic stresses as well as climate change-related disruptions. The next 12 months are likely to be just as eventful, going by the three sets of forces that we see shaping the region in 2020.
At a more hopeful level, we believe that the global economy will improve and so provide more support to Asian trading nations. But, this cyclical bump will do nothing to avert a growing list of disruptions that Asia will have to deal with — in geo-politics, technology, trade regime, climate change and social tensions. And that brings us to the final set of forces — how Asian governments respond to these disruptions will determine which countries will be winners or losers next year and beyond.
Why are we confident about a global recovery?
Events in the past few weeks lend more support to the view that a modest recovery in global demand will be seen by early 2020.
First, the US and China have finally concluded a “phase one” trade agreement. While not addressing the more contentious issues dividing the two big powers, the talks have broken the downward spiral that threatened the world with a full-fledged trade war. The agreement reverses some tariff increases and sketches out a path towards reducing the trade imbalance between the two countries. So, it will probably be good enough to give a fillip to business confidence. Remember that one reason for the global slowdown was that firms had deferred hiring and capacity expansion plans because they feared a trade war. As confidence improves, the capital spending in large economies that is so vital to creating demand for Asian exports of intermediate goods will rise.
Second, there is growing evidence that China’s economy is likely to grow a tad faster next year in actual terms (though not necessarily in terms of the official data). China represents about 15% of the world economy and about 10% of world imports, so any recovery there will feed through quickly to global demand. The signs of recovery are built on de-bottlenecking local government infrastructure plans as well as greater support for the dynamic private sector. Rising approvals of large projects show that local government spending on roads, railways and slum clearance will accelerate in early 2020. Policies to direct more credit to the private sector have begun to work. The first nine months of this year saw the average in- terest rate on new loans to small businesses declining to 6.75% from an average 7.39% in 2018. The sharp jump in corporate loans in November also supports this view. The government has also told public prosecutors to rein in a possibly over-zealous campaign against misconduct in the private sector, which had the unintended consequence of scaring private businessmen into curtailing their business ambitions.
Third, looser financial conditions and increasingly more supportive fiscal policies will help keep growth at reasonable pace in the big three developed economies next year. The monetary policy story is well known — both the US Federal Reserve Bank and the European Central Bank have cut rates. But, we are also seeing a shift in favour of fiscal spending. In Japan, a massive fiscal stimulus will add more than 1% to GDP, according to the government. Even in fiscally conservative Germany, Finance Minister Scholz has now agreed to support his Social Democratic Party’s push for a rise in public investment.
Fourth, there is more evidence that the electronics cycle is turning up. The semiconductor inventory-shipment ratios in Korea have fallen to their lowest level in more than a year and are showing signs of edging up. Worldwide DRAM revenues have started to grow again for the first time since 3Q2018. With clear evidence of growing demand for smartphones and servers, we expect this recovery to be sustained, an immense benefit to producers in East and Southeast Asia.
Finally, the investment approvals data indicate that relocation of production from China to countries such as Vietnam, Malaysia and Thailand will accelerate.
Thus, the overall picture for economic growth in Asia next year is not bad, except for certain downside risks.
Five big disruptions will hit us
The first big challenge for the region is how to contain the US-China rivalry from hurting it. The interim trade deal cannot stop the fundamental breakdown in trust between the two powers from causing an increasingly bitter strategic contest for influence. East and Southeast Asia will be the primary arena for this conflict. This big power struggle could have immediate effects on the region because there are two flashpoints which could be ignited in the coming year.
• Our immediate concern is Taiwan, where the pro-independence incumbent president, Tsai Ing-wen, is on track to win re-election in January 2020. This will bring home to China that political and economic inducements will not bring Tai- wan closer to China; only much tougher diplomatic, economic and maybe even military pressures could halt Taiwan’s drift away from the re-unification with the mainland that China President Xi Jinping has repeatedly stated as his ambition.
• Tensions in the Korean peninsula are almost certain to rise as well. After a year and a half of restraint while it pursued negotiations with the US, North Korea seems to be reverting to its old strategy of calibrated provocations. It has conducted two tests in the past couple of weeks, of what some analysts speculate is an engine for an inter-continental ballistic missile, something that could threaten the US mainland. North Korean officials have also warned the US to expect a “Christmas gift” if it did not step back from its hard line. The regime seems to be gearing up for a provocation of some kind.
The next area of disruption is technology. The retail, transport and financial sectors are already struggling to deal with new technology and now, the automobile sector is being forced to restructure as well. The coming year will see more incumbents in more industries suffer dislocations. The risks to jobs will grow, and the demands for policy responses will also intensify.
A third area that will be of immense concern to highly trade-dependent economies such as Malaysia and Singapore is the erosion of the rules-based global trade regime. The World Trade Organization’s dispute settlement mechanism became ineffective as of Dec 10 — a result of US vetoes of appointments of new judges to its appellate tribunal. Without a fair means of resolving trade disputes, the way will be open for the more powerful economies to intimidate smaller economies on the trade front — 2020 will see more aggressive trade restrictions directed at competitive exporting nations such as those in East and Southeast Asia.
Another set of dislocations will arise out of climate change: Disruptive weather is increasingly causing economic damage in many parts of Asia, so governments can no longer be passive. Around the world and particularly in Europe, other governments are planning bold moves to combat unsustainable practices that contribute to global warming. Such a more forceful response would raise costs for their local companies and so, undermine their competitiveness against companies in other countries that do not act as boldly. Asia should expect more pressure from Europe to match its climate policies or face trade or other restrictions designed to level the playing field. We have already seen some evidence of this in Europe’s policies on palm oil — the region should more such disputes.
Finally, the past year has witnessed outbreaks of social unrest even in normally staid places such as Hong Kong and Chile. While each of these upsurges in violent protests have their own causes, there is a common thread running through them: failure to address issues related to rising inequality, job insecurity, unavailability of affordable housing, and resentment over the growing imbalance between ever-more powerful corporations vis-à-vis vulnerable workers.
Quality of government response to risks will determine winners, losers
While immediate concerns of a global recession may have receded, it is clear that the agenda for policymakers will be quite a busy one next year.
First, even with a slight improvement in growth prospects, there will still be a need for careful monetary and fiscal policies to ensure that domestic demand can be maintained just in case something still goes wrong at the global level. Thus, we should expect a little more easing of monetary and fiscal policies in the region, albeit in a cautious and graduated manner. The world remains a risky place and so, our policy makers should not be taking chances.
Second, governments realise that they need to get the basics right on the home front in order to deal with a risky world. In this regard, policies will be focused on a few areas:
• The infrastructure roll-out will be stepped up across the region to plug a major con- straint on growth. This year, infrastructure programmes were delayed in some coun- tries because of elections or other bottlenecks. This will be reversed in 2020.
• There is also likely to be more emphasis on supply side reforms, to improve competitiveness and the ease of doing business. Indonesia’s planned labour market reforms could be the most interesting of the lot and a potential game changer. Across the region, we are likely to see continued deregulation and other streamlining of bureaucracy directed at improving the business ecosystem.
A third area of policy initiatives will be strategies to build more buffers against the likely increase in trade aggression by big countries. One line of response could be to appease countries such as the US by proactively offering concessions. Vietnam just did this with its recent offer to reduce tariffs on US agricultural exports such as poultry and apples. Another strategy is to make better use of regional trade agreements such as the recently concluded Regional Comprehensive Economic Partnership to bolster regional trade opportunities that could help offset lost export opportunities at the global level. There could also be a bigger push for cross-border or bilateral cooperation.
Finally, the more astute political leaders will realise that they have to anticipate social tensions if they are to avoid the unrest that plagues so many countries. This could involve higher social spending to buy off resentful segments of the population, be they farmers who are enduring low prices or young urbanites who want decent jobs and cheaper homes. Taxes on the wealthy might have to go up to fund these social interventions as well as to address rising inequality.
Conclusion: Which countries are likely to do better?
This could be a contentious area of discussion, but it will be crucial to understanding how countries will fare in 2020.
• Countries such as China, the Philippines, Singapore and Vietnam appear to have carefully mapped out strategies to deal with a range of challenges. Indonesia is also evolving sound policy responses. This does not mean that these plans will succeed — bad luck or poor implementation could be obstacles — but it does place these countries in a better position.
• Korea and Taiwan have robust private sectors that will complement national strategies and so, help those countries get through some very real challenges.
• Thailand and Malaysia have some sound economic strategies and are well-placed in many ways (such as through benefiting from production relocation out of China), but need to ensure that politics will not cause convulsions.
• Hong Kong’s political unrest will not have an easy solution and will therefore continue to constrain the territory’s ability to navigate the turbulence next year.
• India is facing some stiff challenges. Policy responses have yet to prove their effectiveness. The government’s political initiatives have in some cases sparked off unrest, which further complicates its prospects. Eventually, India’s dynamic business sector will find its balance and the economy will improve, but the nation is likely to underperform its potential.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy