The global economy is set to grow at 3.9% in 2018, the fastest pace in five years. As the news cycle keeps reminding us, there are considerable risks to this outlook, not least an end to quantitative easing (QE) and a full-scale US-China trade war. Nonetheless, there are reasons to remain “uncomfortably optimistic” about growth in 2018 and 2019, in part because of the leading role played by Asia-Pacific economies.
Using purchasing-power parity (PPP) exchange rates Asia ex-Japan will contribute nearly 60% of global growth this year; China alone will contribute 31%. We still expect China’s economy will grow 6.6% this year, only a modest slowdown from 6.9% in 2017. This is partly because China has already adjusted its policies to support domestic demand. If the 2018 budget is fully implemented, we calculate the fiscal deficit to be 0.9% of GDP (or CNY 1.1tn) higher than last year – a clear signal that the government is committed to achieving its 6.5% growth target for 2018.
It’s true that China also faces domestic challenges – a housing market downtrend and deleveraging, for instance – but policymakers have skilfully managed the twin goals of stabilising corporate debt and delivering economic growth. Another point in China’s favour is that the impact of the end of QE, which has put a range of emerging markets under pressure, is not an issue given its lack of external exposure of the kind that has hit Turkey, Argentina and others. If anything, China faces a wave of inbound foreign investment as it continues to remove technical barriers to investing in its capital markets. No one expects RMB depreciation to be a one-way bet.
Exchange rate flexibility will also limit the global economic impact of a trade war on other major economies, too. Considering that a 10% increase in what US consumers would have to pay for imports from China would not be too different from the impact of a similar move in exchange rates (which in any event has been countered by USD/RMB moves this year), worries about the impact may have been overdone.
It is also a fact that identifying which countries would win, and which would lose from the fallout is far from easy given the immensely complex supply chains and economic inter-relationships that now underpin global trade. In an extreme scenario where the US halts all China imports, Malaysia’s GDP might be affected by 1.2 percentage points.
In our analysis, four of the top five “losers” – Vietnam, Malaysia, Taiwan and South Korea – are also likely to be among the economies that would gain most from export trade diversion due to targeted US tariffs on China. Vietnam, for instance, could see exports diverted from China increasing by 2.2% of GDP.
These economies could also see some diverted investment, as companies seek to reduce their exposure to China and diversify their production around the region. ASEAN nations (as well as Mexico) are particularly well positioned for this; in fact, rising wages in China means this is already happening.
Then there is the fact that demand within the region is likely to keep growing: ASEAN-China is a trade corridor with exciting growth potential. China’s attempts to promote global trade networks and open links between Asian and the rest of the world via the Belt & Road initiative underlines this expectation.
True, the Belt & Road has been facing its own challenges that require China to become more transparent by better aligning itself with prevailing international standards in areas such as cross-border debt and procurement policies. Regardless, we see a stronger and more immediate impact from China by being a positive force in stimulating international cooperation and trade via the Belt & Road.
Of course, the risks to this outlook cannot be ignored. How a protracted trade war will affect sentiment and investment plans remains to be seen. Longer term, China’s policy focus on growth will be eased, the impact of US fiscal stimulus will wane, and the demographic drag in Asia throughout the 2020s will also be acute.
But regardless, the importance of the Asia-Pacific region in powering global growth will continue to rise, and its resilience in the face of global headwinds justifies our uncomfortable optimism.