Economic growth in emerging Asia will fall to its lowest level since 2001 next year, according to a consensus forecast of 90 banks, asset managers, consultancies and rating agencies across the region.
The slowdown — tipped to be only the start of a longer term downward trend — will have wider ramifications, given emerging Asia’s ever-growing share of global output and the region’s erstwhile ability to keep global growth humming even when the rest of the world was struggling, as during the global financial crisis.
The 19 largest economies across emerging Asia will expand by 5.8 per cent in 2019, according to the forecasts collated by FocusEconomics. While this is highly likely to outstrip growth anywhere else in the world, it would represent a slowdown from a projected 6 per cent growth rate this year and would be the weakest reading since 2001, when regional growth fell to 5 per cent as the tech bubble burst.
If the consensus forecasts are correct, the deceleration will then continue until at least 2022, when growth will be 5.3 per cent, as the first chart shows.
The projections are markedly gloomier than those of the IMF, which said in April it expected the economies of emerging and developing Asia (a group of 30 countries including many small ones) to expand 6.5 per cent this year and to remain at this growth rate, if not higher, until 2020, before easing to 6.3 per cent in 2022.
Regional growth “will inevitably slow down in the coming years”, said Ricard Torné, lead economist at FocusEconomics, who said the deceleration had started already.
“In the third quarter, weaker global growth and an uncertain trade outlook have started to bite, with manufacturing activity stuttering. The manufacturing PMI readings have declined in the first two months of the quarter in China and Taiwan, while Korea’s remained in negative territory,” Mr Torné said.
So far, at least, there is no evidence that the Trump administration’s decision to impose tariffs on $50bn of US imports of Chinese goods, and on a further $200bn as of this week, has hit economic activity in Asia.
Gareth Leather, senior Asian economist at Capital Economics, noted that: “China’s exports to the US expanded at a faster pace in July and August than in the second quarter. Korea and Taiwan, which are key suppliers of intermediate goods to China, have also seen their exports to China hold up well.”
However, both economists raised the possibility that this resilience may be a case of companies trying to “front-run” the widening of the tariff regime.
Mr Torné also pointed to the rising strain on countries with high dollar debt loads as a result of a widespread depreciation of regional currencies against the greenback, as well as twin current account and budget deficits in countries such as India, Bangladesh, Sri Lanka and Pakistan.
GDP growth in the latter is expected to slow sharply from 5.8 per cent this year to 4.7 per cent in 2019 as the country also grapples with rapidly depleting foreign reserves.
The consensus forecasts suggest that Chinese economic growth will slow by 0.3 of a percentage point to 6.3 per cent next year, and continue to decelerate by the same rate annually until 2022, extending a broad slide from a peak of 14.2 per cent in 2007.
“Economic dynamics in China will soften in any scenario, even if a full-fledged trade war with the United States is avoided,” Mr Torné said.
“The Chinese authorities have embarked on a lengthy transition towards a more sustainable economic model, based on services and domestic consumption, which also entails weaker growth rates.”
Gabriel Sterne, head of global macro research at Oxford Economics, agreed, arguing that China’s ongoing slowdown replicates that seen in more advanced emerging markets when they were at similar levels of development compared to the US.
Hong Kong is expected to fare far worse, however, with growth slowing from 3.6 per cent this year to 2.7 per cent next, thanks to the slowdown on the mainland, rising interest rates and the strengthening of the (US dollar-pegged) Hong Kong dollar against its regional peers.
In contrast, growth is expected to tick up a fraction to 7.5 per cent in India next year and hold close to this level in subsequent years.
“Surprises could come from south Asia where there is still a lot of untapped growth potential,” Mr Torné said. “However, the slow progress in economic reforms, smaller financial buffers compared to their peers in east Asia and poor infrastructure continue to damp any sharp turnaround.”
Mr Leather cited softer global demand for Asia’s exports, due to weaker global growth, and tighter monetary policy in the likes of Indonesia and the Philippines as factors likely to fuel a slowdown in regional growth.
However, he forecast that the slowdown would proceed at a “gradual pace,” with oil prices likely to fall next year and fiscal policy remaining supportive in much of the region, particularly the Philippines, Thailand and Taiwan, which “all have ambitious infrastructure projects in the pipeline,” as well as Singapore and South Korea.
Mr Sterne, whose consultancy is among those forecasting the weakest regional growth for 18 years in 2019, at 5.6 per cent, said “in a way it’s a shame that China and Asia are slowing, but it’s inevitable. It’s partly due to demographics and partly there are only so many people you can move from the country [to more productive employment in urban areas].”
In one sense, Mr Sterne does at least suggest this may be less bad for the global economy than at first it may appear. Even though the region’s growth is slowing, because it is still growing faster than the rest of the world, its share of global GDP rises ever higher with every year that passes.
Given that its contribution to global growth is the product of its growth and its share of total GDP, this means its positive impact may still be rising. The second chart illustrates this in relation to China, whose contribution to global GDP growth has held up even as its own growth rate has fallen.
In another sense, however, China’s projected slowing in the coming years could be awkward, given that most observers expect the US economy to also decelerate, with the IMF pencilling in growth of 2.9 per cent this year, 2.7 per cent in 2019, 1.9 per cent in 2020 and lower figures still out to 1.4 per cent in 2023.
Mr Sterne said the world’s two largest economies have been running “incredibly countercyclically for the last decade”, epitomised by China’s stimulus-led growth spurt during the global financial crisis, when the US fell into recession.
As an example of this, the two countries’ output gaps, the difference between their actual and potential GDP, has exhibited a correlation of minus 78 per cent over the past decade, illustrated in the final chart.
“The extent to which China and the US have inadvertently co-operated to offer stabilising forces on world GDP is under-appreciated,” Mr Sterne said. “The world economy has benefited from this global shock absorber effect; [the correlation] has never been this negative before.
“That is definitely not going to last and the world economy may suffer as a result of the two giants each being hit by a negative trade shock.”
Get alerts on Asia when a new story is published