Paul Hsiao, Economist at PineBridge Investments explains that Asian ex-Japan economies (Asian economies excluding Japan) are still dominating world GDP growth.
Asia ex Japan remained the fastest growing geographical region in the world in 2018 despite weaker currencies, a slowdown in Chinese growth, and the implementation of more US protectionist trade policies. In 2019, we expect those headwinds to subside as the US and China inch closer to a trade resolution and Chinese policymakers enact more stimulative fiscal measures. Those conditions should support both economic activity and financial markets throughout the year.
Strong headwinds couldn’t stop growth in 2018
Asia ex Japan remained at the epicenter of global growth. GDP expanded an average 5.6% year-on-year in 2018, compared with the global average of 3.7%, driven by activity from China, India, and Indonesia.
Growth persisted despite a sharp strengthening of the US dollar against most Asian currencies, higher central bank policy rates, and the implementation of more US protectionist trade policies – all of which weighed on market sentiment.
Country-specific factors challenged growth rates. In China, both the central government’s deleveraging campaign and the trade war with the US were major contributors to the economic slowdown in 2018.
As of third-quarter 2018, ASEAN growth slowed to 4.4%, down from a 5.2% average set in the first half of the year, with export-oriented segments particularly affected. In addition to the headwinds stemming from more protectionist US trade policies, South Korean growth suffered in 2018 as a result of an ill-received minimum wage hike that led to a sharp drop in business sentiment and a slowdown in hiring.
India’s growth was particularly strong. The announcement of a more expansionary fiscal budget and a recovery in domestic demand propelled real 2018 GDP growth close to 7.5%.
A better backdrop is ahead in 2019
Asia ex Japan should remain the fastest growing region in the world. We forecast real GDP growth of 5.9% in 2019 compared with 6.2% in 2018, a marginal deceleration.
Many of the drags the region faced in 2018 are set to reverse in 2019. The announcement of a slew of easing measures in China, including a household tax cut and a broad injection of liquidity, should help business sentiment and allow credit to rebound.
US dollar strength should subside as a result of a more dovish Federal Reserve and slower US growth. We also anticipate many Asian central banks will refrain from tightening policy if currencies do not turn sharply lower.
Finally, any announcement of a US-China trade truce should benefit export-oriented economies in Asia and provide a rebound in business sentiment.
Politics and policies are key risks in 2019. Our outlook is not without risks. Growth in the Asian region could be hampered if US protectionist trade policies ramp up in the form of a global auto tariff or more tariffs levied on China.
Within Asia, key elections in Thailand, Indonesia, and India could have significant economic impacts, especially if the structural reforms set in place by previous administrations become stalled. Finally, if China fails to successfully restimulate its economy, it could be a drag not only for Asia but also for the world.