US President Donald Trump (L) and China’s President Xi Jinping shake hands at a press conference … [+]
Artyom Ivanov\TASS via Getty Images
2020 is shaping up to be more eventful than expected. As anticipated, Britain has left the EU. There is a change of guards at the European Commission. The presidential election in the U.S. will see Donald Trump seeking a second term to continue to make America great again. Meantime, tension has risen in the Middle East with the assassination of Iran’s top general Soleimani by the U.S. while Trump’s “peace plan” was rejected by most Palestinians. The downing of the Ukrainian civilian flight by Iranian missile ignited widespread protests within the country, putting pressure on its Supreme Leader. As if these are not enough, an outbreak of coronavirus flu that originated in Wuhan, China, has gone global.
Against this backdrop, five members of the Forbes Asia Panel Of Economic Commentators shared their insights on a wide range of issues. These include the expectation of a shallow recession in the U.S., stagnant growth in Europe, monetary policy becoming more accommodative in the major economies, a rebounding Chinese economy (assuming that it does not get derailed by the coronavirus outbreak), improving prospects of a cyclical upturn in Asia, and that the realignment of global supply chains as a result of the trade war turns out to be beneficial to many emerging Asian economies. But the “phase one deal” that took effect in January in the U.S.-China trade war is considered irrelevant over the long term because the fundamental issues in the U.S.-China rivalry remain unresolved. And from the perspective of India, navigating successfully in a global economy buffeted by disruptions and volatile capital movement will be important, especially avoiding having to chose between U.S. and China.
Overall, the tone of our Panel Members is one of cautious optimism. The big unknown is, of course, the potential impact of the Wuhan coronavirus flu.
Jim Walker on the U.S., Europe and Asia in 2020
(Photo by Cherry Wong)
We are in the camp that believes the U.S. economy will hit a recessionary speed-bump in 2020. Over the years we have relied on a series of indicators which have a good track record in forecasting U.S. downturns. The U.S. yield curve across the one-year and five-year range has been inverted since late-2018 and sent a recession signal in the first quarter of 2019. Experience shows that it then takes anywhere between 12 and 24 months for this signal to translate into a U.S. recession. We have been of the view that the likely timing of a technical U.S. recession starting is somewhere between the second and fourth quarters of 2020.
We have been more inclined to the view that the recession will take hold earlier rather than later in that timeframe simply because confirmatory signals have been sent by construction spending and durable goods orders. These indicators have much shorter lead times into a recession than the yield curve. Our best estimate is that the U.S. economy will contract on a quarter-on-quarter basis in the second quarter of 2020, and then contract again the next quarter. We do not envisage that these contractions will then escalate into a full-blown crisis similar to what happened in 2008. The main reason for this is that nominal growth in the United States has been well in excess of the level of interest rates for the last decade. That continues to be the case today and suggests that even a few quarters of negative real growth–most likely inventory-correction led–will not be enough to produce a barrage of bad debts in the banking system. We might be worried about the secular slowdown in growth globally, but it is debt-servicing capability that counts in avoiding financial collapses.
Elsewhere in the developed world, consensus estimates suggest no acceleration in growth in the euro area (1% in 2020 versus 1.1% in 2019) and a modest slowdown in the U.K. While growth is expected to halve in Japan from 0.9% to 0.4%. We would be more upbeat about Japan, but have no reason to question the circa 1% growth rates forecast for Europe.
All-in-all this would result in an unspectacular 1% real GDP growth in the richest countries. But add on a modest 1% inflation outlook and that 2% nominal growth would add around $850 billion to global demand alone (more than double the contribution likely to come from the developed countries for full year 2019). If it is accompanied by a weakening dollar then it could easily be the case that the rich countries could contribute more than $1 trillion to expanded demand in 2020. Asian exporters would be licking their lips at this prospect.
In short, 2020 is likely to produce more of the same in terms of GDP growth in the developed world with, if anything, some upside to demand when converted to U.S. dollars. It would not be enough to create a boom but it should settle nerves somewhat.
With the developed economies set to add more dollar demand in 2020, how is the second-largest economy in the world, China, likely to fare? Perhaps concerns over the trade war had something to do with it, but it is equally the case that the Chinese economy is slowing naturally. In the first decade of the 21st Century, China was adding more than 10 million workers per year on average. Stimulus tools–including the exchange rate and monetary policy–were firing on all cylinders to absorb this increase in the labour force and, at the same time, facilitate a degree of restructuring out of the old state-dominated industries. But since 2015, the Chinese labor force has stopped growing. From here, it will be impossible for China to ramp up growth towards 7% per annum on a sustained basis. Truth be told, we suspect that real growth is already well below 6% and, in all likelihood, on a secular downtrend over the course of the next decade.
But that does not mean to say the economy will slow steadily. As the services sector, driven by the new technology adoption begins to dominate we should expect periods of growth acceleration followed by periods of slowdown. In other words, we should prepare for normal business cycles in China produced by gales of creative destruction.
Judging by the persistently high levels of consumer confidence, it will take very little at all for the next phase of the Chinese business cycle to turn upwards. Current policy settings would support that view and the prospect of further cuts in reserve requirements ratio–merely a normalization process–would further build momentum. All that is really required to see a significant expansion in growth in China in 2020 (to between 6% and 7% in real terms) is an end to the trade uncertainty. Nominal growth in China, under those circumstances, would rebound into the 9% to 10% range.
Nominal growth of 9% in China would add almost $1.2 trillion to global growth in one year assuming a stable yuan/U.S. dollar exchange rate. But how likely is that? The trade deal with the U.S. should move the renminbi firmly through the 7 yuan/$1 level and likely push it towards resistance at 6.7 yuan/$1. Generalized Asian currency strength against the U.S. dollar would be further reinforced if, as we believe, U.S. interest rate cuts resume in the first quarter of 2020.
In general, Asian currencies have been stable-to-strong in relation to the U.S. dollar in the past year. The notable exception has been the Korean won (although even it has recovered sharply from its trough in September). Yuan weakness can, in part, be explained by the won and euro. Both of these currencies had lost ground against the U.S. dollar and between them make up 11% and 16%, respectively, of the China Foreign Exchange Trade System (CFETS) basket. Depreciation pressures have subsided sharply in 2019.
The outlook for a cyclical upturn in Asia, boosted by rising dollar-denominated global GDP and a recovering China, is good. The persistence of growth across much of the region in the last decade adds to our confidence. We look forward to a more upbeat growth year generally in 2020 (if not in the U.S.) and continued strong performance in Asian equity markets, particularly those most open to international trade.
FAN Gang’s Long-Term Perspective on the U.S.-China “Phase One” Trade Deal
(Photo by Fei Lin)
The U.S. and China have reached a trade deal that is meant to de-escalate the trade war. As positive as this deal is in the short term, bilateral relations between the two countries remains fragile and there is not much ground for optimism over the long term. In fact, from a longer-term perspective, the threat of the decoupling of the U.S. and China in both technology and perhaps even in investment and trade remains, and will be a source of chronic instability in the global economy for years to come.
The “phase one” deal itself reveals the absurdity of the current situation in bilateral trade between the U.S. and China. To alleviate America’s trade deficit with China, the Chinese government has committed to purchase more agricultural products and natural resources from the U.S.: soy beans, pork, natural gas, etc. Given that China’s trade surplus against the U.S. is a result of its export of manufactured goods, an observer with no background knowledge of the two economies would conclude that China is a much more developed country than the U.S.! According to the economic principle of comparative advantage, it is a less developed country that exports primary products and soy beans and pork to a more developed country, and in turn import manufactured goods that the more developed country is more efficient in producing. In the context of the U.S.-China trade war, the principle of comparative advantage has been turned upside down. This is because the U.S. now sees China as a strategic threat, and is blocking sales of high-tech products to China in an effort to slow down its advancing technological capability. From this perspective, this “phase one” deal does not resolve any of the deeper issues in the U.S.-China rivalry.
At the most fundamental level, the U.S. is demanding that China dismantle its approach in managing its economy, including the strategic role assigned to selected state-owned enterprises, the deliberate and gradual pace in pursuing structural reform, the managed opening of its financial sector etc. The fact of the matter is that China will continue to evolve and fine tune its industrial policy as it sees fit in relation to its stage of economic development. China will not adopt wholesale the market liberalization dogma preached by the U.S. There is, therefore, no easy solution to the deep schism separating the respective American and Chinese positions in the trade war.
The trade war should not be interpreted as something specific to the Trump presidency. The fact of the matter is that there is a rare bipartisan consensus in the U.S. that China is becoming an increasingly dangerous challenge to American global dominance. Whatever the outcome in the 2020 American election, trade and other actions against China will continue.
The current bilateral trade imbalance between the U.S. and China is about $400 billion in 2018, according to U.S. census data, a figure that was repeatedly cited by President Donald Trump to justify his initiation of the trade war. Such an imbalance clearly cannot be fixed by a temporary shopping spree by China as stipulated in the “phase one” deal, especially when all high-tech products are off the table. The trade imbalance between the U.S. and China will persist, and will continue to fuel the rivalry between the two countries for the foreseeable future.
It is, of course, a lot better for both U.S. and China to find a way out of their current confrontation and resume a more normal bilateral relationship in trade, investment, and cooperation in the development of technology. But there is little ground for optimism. China has to be prepared to go it alone, facing an American government, Democrat or Republican, that is determined to block the rise of China. In this scenario, global supply chains will be disrupted, and global companies will find themselves between a rock and a hard place; being forced to work with either the U.S. or China. But they could not do what they really prefer, working with both. China may have a slight advantage in that its imports are growing faster than the U.S., and could become the world’s largest import market within a few years. As such, it would be extremely difficult for global companies to not work with China. The country has also become more open to foreign companies operating in China, even in the financial sector where many restrictions are being removed.
Finally, we should not interpret, like many have done, the slowdown in China’s GDP growth as a result of the trade war. In fact, the trade war so far has had only very marginal impact on the Chinese economy. The slowdown in China’s GDP growth is more of a reflection of the unfinished business of reducing overcapacity in some industrial sectors as well as efforts in cutting the massive debt load created during the 2009 and 2010 period. These adjustments are still continuing even though the end is in sight.
The “phase one” deal, to the extent that it can reduce some uncertainty in the short term, would help with making 2020 a more stable year. As such, it is a welcomed development.
Simon Ogus’s Cautious Optimism on Asia in 2020
(Courtesy of )
As we enter a new decade, some of factors that have weighed heavily on Asia in 2019 appear to be dissipating, or at least do not seem to be getting worse. The Federal Reserve in the U.S. is no longer contracting its balance sheet, while the People’s Bank of China has also turned more accommodative. Neither appear to wish to open fully the fire hoses, but at least global liquidity conditions are no longer tightening.
There are also some initial signs that the global trade cycle may also be stabilizing while sentiment should be boosted, at least temporarily, by a time-out in the U.S.-China trade war. Of course, U.S.-China tensions are about much more than just trade and will not be solved fundamentally by China agreeing to buy a few more American agricultural products. The recalibration of global supply chains is just beginning as is the Balkanization of technology and financial markets.
The good news is that much of Asia is well positioned to benefit from such realignments assuming it can remain relatively politically neutral and can enhance its absorptive capacity. Not all production can or will relocate from China but even small shifts away from the PRC represent large numbers in the context of its smaller neighbors. A welcoming investment climate, flexible labour markets and improved infrastructure will all help to attract renewed FDI flows.
The risks to this relatively optimistic scenario remain largely external: U.S. political and market dislocations; renewed U.S.-China trade tensions; accelerating defaults in the PRC’s highly stretched financial system, and the like. One cannot dismiss the potential for poor policy-making decisions and heightened local political tensions, but the region’s domestic fundamentals remain largely sound with little evidence of major internal and external economic imbalances.
Manu Bhaskaran on Key Challenges in 2020
There is too much pessimism about growth in 2020. The reality on the ground suggests otherwise. Firstly, the second largest economy in the world, China, is rebounding as spending by local governments on infrastructure is picking up, which will have strong spillover to Asian exports. More buoyant conditions in Asia will be supported by the easing of both monetary and fiscal conditions in the G3. The global trade cycle will in turn benefit from an upswing of the electronics cycle, which will boost the export performance of emerging Asia plugged into the global supply chains. Finally, governments across Asia are stepping up their infrastructure spending as well, with some of them benefiting from production facilities being relocated from China as a result of the trade war.
The bigger question is how to deal with an era of many disruptions. A key risk in this regard is in geopolitics, where the Southeast Asia region could become the arena of intensifying rivalry and confrontation between the U.S. and China. Countries in East and Southeast Asia could find themselves between a rock and a hard place in such a situation.
The breakdown of the dispute settlement mechanism of WTO will be another disruption that is gradually eroding the rule-based multilateral system in global trade, which will have many undesirable consequences over the longer term.
Like the rest of the world, Asia will also have to adjust to technology disruptions across many sectors. While the retail sector has come under the impacts of technological disruption for some time, it is expected that other sectors from public transport to autos will be increasingly affected.
Finally, there are two big unknowns, climate change and pandemics. It is unclear how serious the impacts of extreme weather has in store for the planet, and whether the Wuhan outbreak of flu virus could be contained; and their economic consequences remain unclear. But the risks are there. It is also clear that effective global cooperation and policy coordination will be needed in addressing a challenge like climate change, and yet this is exactly what is lacking in the world at present.
The key question is whether countries can formulate strategies and implement them effectively to address these challenges and mitigate potential risks. The winners will be those economies with clear-minded government strategies that can be combined with a vibrant bottom private sector. There are two levels of response. At the multilateral level, we have an effort to keep the momentum of trade opening through things such as CPTPP, RCEP, etc. But individual countries will also have to respond, by adjusting their growth models, building buffers against global turbulence, etc.
Suman Bery on How India Needs to Navigate a New Global Order
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With Indian economic growth slowing, commentary is focused on India’s Finance Minister Nirmala Sitharaman’s 2020–21 Union Budget. Less public attention is being paid to country’s external challenges. The world economy matters to India today, and India has itself become a global player. The rules-based multilateral economic order, which supported global integration for a generation is under widespread challenge. As multilateral institutions weaken and bilateral negotiations assume centre stage, India is compelled to articulate an economic sovereignty that’s politically grounded domestically, while remaining sufficiently flexible to grasp opportunities in the years ahead.
Deep shifts in global order have been building, but a key marker is the 2008 financial crisis. Its origins in the most advanced financial markets provoked continued widespread questioning of the liberal consensus in vogue. The crisis also triggered recognition by the advanced countries (meeting as the Group of Seven) that emerging markets were systemically important in output, trade and finance. The Group of 20 (G20), including India, first met at the head-of-government level in 2008 and has met at least annually since.
G20 participation has had subtle but profound implications. Two deserve attention. As with the G7, meetings among leaders on the great issues facing the world economy has downgraded the importance of treaty-based economic institutions, notably the IMF, the World Bank and the WTO. These institutions possess the legitimacy of near-universal membership and hold formal responsibility for guiding the global economy, but ended up followers rather than shapers of cross-border policies between the world’s economies. They are accordingly less effective in cushioning disagreements and ensuring consistency of treatment than originally intended. These developments affect India adversely. Second, the G20 embodies a shift in global attention from national living standards (real per capita income) to size of economy. The doctrine of poorer countries receiving special treatment has been replaced by expectation of burden-sharing, irrespective of level of development. Two critical domains are in rules for trade and expected action on climate change. As the poorest (and least urbanized) G20 member, India’s particularly affected.
Changes in the political economy of inter-governmental relations have been accompanied by unsettling global economic changes that could be seen as a “new normal.” One feature is the collapse of inflation, particularly in the advanced economies, but even flirted with by China. This shift is reflected in astonishingly low interest rates, whose weakness as a monetary stimulus tool has led to massive expansions in advanced countries’ central bank balance sheets—designed to stimulate spending by boosting the prices of domestic financial assets. While the recovery in growth is welcome, the associated global monetary disorder and volatile capital movements complicate economic management in emerging markets such as India.
Equally troubling are two other developments: the slowing in world trade growth since 2008 and the rise of anti-migrant sentiment in many advanced economies. Trade and immigration are beneficial for growth, productivity and real incomes. Populist politicians have been quick to blame “unfair” globalization for stagnant wages, rising inequality and for hollowing out manufacturing sectors. The spectacular success of China as an exporter of manufactured goods has provided ammunition to these critics.
India is compelled to take a clear-eyed strategic view of the emerging international economic landscape and the implications for growth. Even if India’s development path remains largely driven by domestic choices, shifts in the global order will affect its opportunities. Fresh thinking in its economic diplomacy is urgently required. In addition to financial volatility mentioned earlier, there are three sources of worry: access to markets, access to technology and weakened multilateralism.
Till now India has taken comfort that WTO rules would maintain its market access in merchandise trade. Today the WTO’s dispute settlement function is shut down by U.S. veto; the consensus principle is regarded by advanced economies as ‘unworkable’; special and differential treatment is being challenged; the issue of state aid for exports has become a major concern; and new issues such as digitalization are being discussed in plurilateral groups that India has chosen to avoid. With China in mind, new disciplines are being discussed in export subsidies and state-owned enterprises. India, with its considerable state involvement, could also come afoul of these and has already been challenged on subsidies.
In technology, India—a non-signatory of the nuclear Non-Proliferation Treaty (NPT)—has long experience of exclusion from dual-use technology regimes. Given growing U.S.–China rivalry, there’s been enormous widening of technologies believed to be strategic. 5G telephony is the most egregious example. The United States and the European Union are attempting to place screening mechanisms for foreign investment where the underlying intent is judged to be non-commercial. Again, India’s commitment to strategic autonomy may conflict with these tighter rules.
India needs to think about its interests, assets, selection of partners and domestic capacity to provide reciprocity. It’s not in India’s interests to be forced to choose between the United States and China. Both offer different opportunities: the U.S. cutting edge research and technological cooperation and Chinese investment finance and cheap capital goods. If India believes the United States is economically misguided in focusing on bilateral trade deficits, then it shouldn’t repeat the same fallacy in its own bilateral trade relationship with China. An obsession over the trade deficit with China is reportedly a major reason behind India’s step back from the Regional Comprehensive Economic Partnership.
India’s economic diplomacy must seek to strengthen a reformed and inclusive multilateralism—an arena where it has considerable expertise but traditionally been shy, other than perhaps at the WTO. India has had a seat at the top table for over a decade. As its 2022 G20 presidency approaches, 75 years after its independence from Britain, it must seize the opportunity to shape the menu in cooperation with like-minded partners.
Suman Bery’s article was published earlier in the East Asia Forum.