China-US Trade War Threatens East and South Asia’s Outlook

June 20, 2018//-While growth in the East and South Asia (ESA) region is losing some speed on the back of a maturing global economic cycle, the tit-for-tat trade spat between China and the United States is threatening to add further downward pressure to ESA’s economic outlook.

This is according to FocusEconomicsa leading provider of economic analysis and forecasts for 127 countries  in Africa, Asia, Europe and the Americas.

On 15 June, the United States imposed a 25% tariff on USD 34 billion worth of imports from China and put an additional USD 16 billion under review for future tariffs.

China immediately retaliated with measures of a similar magnitude. The war of words continued, and, several days later, U.S. President  Donald Trump threatened to implement up to USD 200 billion in additional tariffs if China retaliates.

So far this year, the Trump administration has implemented tariffs on washing machines, solar panels, steel and aluminium. While these measures affect a wide range of countries spanning from the European Union and Canada to Korea and Mexico, the main target of Trump’s action has been China and its plan to upgrade its industrial sector.

In its July 2018 estimate released this month, it noted: “The impact of the current tariffs on the ESA economy is expected to be limited, as the affected products represent only a small share of the region’s total exports.

An escalation of trade protectionism measures, however, could derail an otherwise robust growth trajectory in the region.

A general increase in tariffs between China and the United States would hurt business confidence worldwide and, by extension, investment”.

Moreover, reduced demand for manufactured components will negatively affect suppliers for those products, which are mostly located in Asia, the report added.

Outlook

ESA’s economic outlook continues to benefit from a stronger than-expected start to the year due to accommodative monetary policies, bold fiscal support and resilient global growth.

That said, economic activity is expected to moderate in the second half of the year due to softer global growth and, therefore, slowing external demand.

Financial conditions are gradually tightening on the back of higher interest rates in the United States.

Moreover, while the direct economic impact of the trade disputes between the United States and some other key global economies, mostly China, has been limited for now, a further escalation in trade tariffs could seriously undermine global trade.

This month, FocusEconomics panelists upgraded their growth estimates for the ESA economy for the first time in five months. Our panel of analysts now expects the ESA economy to grow 6.2% in 2018, up 0.1 percentage points from last month’s estimate.

Reflecting rising economic uncertainty and a transitioning Chinese economy, regional growth for 2019 is seen slowing to 6.0%. This month’s upgrade to the ESA region’s economic outlook for 2018 reflects improved growth prospects for Hong Kong and Mongolia.

Regional behemoths China and India, as well as Korea, Sri Lanka and Taiwan, saw no change to their forecasts. Advance government estimates put growth in Bangladesh and Pakistan at multi-year highs in Fiscal Year 2018, which ends in June.

Bangladesh is expected to be the fastest-growing economy in the region this year, if preliminary estimates are confirmed, followed closely by India. The Chinese economy is expected to expand a robust 6.5%. The more mature economies of Korea and Taiwan will likely be the region’s laggards, logging expansions below 3.0%.

Growth accelerates in Q1

Economic growth in the region was robust in first quarter (Q1) on the back of largely accommodative monetary policies, strong global growth and bold fiscal support.

A comprehensive GDP growth estimate for the region shows that ESA countries expanded an aggregated 6.4% annually in Q1, marking the fastest growth in over three years.

The print was a notch above both Q4’s 6.3% increase and last month’s forecast of 6.3% growth. The upward revision reflected stronger-than-expected growth in India as bold government support propelled public consumption, household spending and gross fixed investment.

Risks, however, are looming: A narrowing output gap and the tightening cycle in the United States is forcing the Reserve Bank of India to abandon its loose monetary policy stance.

Rising oil prices will increase India’s import bill, exacerbating external imbalances, while the country’s battered financial system will continue to weigh on growth.

Moreover, uncertainty ahead of next year’s general election will likely dampen business sentiment. Recent data suggests that economic growth is losing some momentum in Q2.

Despite remaining resilient, export growth is moderating across the region as the tech cycle likely peaked in Q1.

A softer external sector is translating into a smaller backlog of work at Asian factories. As a result, in general, manufacturing purchasing managers index (PMI) readings in the ESA region have been on a clear downward trend in the second quarter.

Lower manufacturing activity has the potential to increase unemployment among export-driven economies, threatening to reduce household consumption. Resilient economic activity in the United States, meanwhile, is forcing the Federal Reserve to accelerate its tightening cycle.

As a result, currencies in the region are weakening against the greenback, and interest rates are slowly rising. Although a majority of countries in the region hold large amounts of foreign currency reserves, preventing any sharp deterioration in their external accounts, a strong U.S. dollar and a widening interest rate differential with the U.S. will prompt central banks to end their loose monetary policies sooner than previously expected.

Against this backdrop, FocusEconomics panelists pencil in a deceleration in Q2, with growth in ESA seen slowing to 6.2%.

African Eye Report

 

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