Suparna Goswami Bhattacharya

October 20, 2016: It is the last quarter of the year and things have changed drastically since January for the global economy. Asia, in particular, has witnessed a change in outlook by economists.

Back in January, things looked shaky. Chinese currency wobbles, deterioration in economic data rattled investor nerves. In short, back then it was thought that the global economy, especially Asia, will be witnessing a rocky year.

Jump to the present and things have turned out to be pleasant surprise. Stronger-than-expected growth in China explains Asia’s stable growth trajectory.

Frederic Neumann, co-head of Asian Economics Research, HSBC, says, “Thanks to China, Asia has indeed had a decent year so far. Brexit, too, did not overtly rattle nerves in Asia.”

Additionally, the US Federal Reserve’s decision to postpone interest rate hikes also contributed to the stability.

“Monetary policy delay in the US due to mounting global headwinds has taken the pressure off Asia’s exchange rate and financial markets,” says Ricard Torne, head of economic research at FocusEconomics.

China government plays Santa

There is little doubt that China’s economy fared better mainly because of the policy support it received from the government. One of the consequences of government-led growth has been a surge in housing prices, particularly in main cities.

“More recently, in an attempt to tackle burgeoning corporate debt, the government unveiled a series of measures, which included encouraging mergers and acquisitions, swapping debt for equity and facilitating firms’ bankruptcy,” states Torne adding that he expects the economy to grow at 6.6% this year and 6.3%  in 2017.

A reduction in growth though is not necessarily worrying.

Adam Cotter, head, Asia Pacific, Official Monetary and Financial Institution Forum, says, “Slower growth is normal for the world’s second-largest economy. GDP growth around 6% is still impressive by global standards.”

Though things certainly look more upbeat now with the renminbi’s inclusion in the SDR of the International Monetary Fund (IMF), it is unlikely to be a lasting phenomenon. The SDR is an international reserve asset created by the IMF to supplement its member countries’ official reserves.

“Notably, the likely tightening of monetary policy in the US in December would cause the renminbi to depreciate against the dollar temporarily. Since growth in recent quarters has been fuelled by short-term factors, notably government stimulus, this needs to be changed in the long run. Stimulus-driven short-term gains to the economy risk jeopardising its sustainability growth mode,” adds Cotter adding that China anyway is overly reliant on credit expansion.

Other growth engines

Though China continues to be the one of the most important drivers of growth in Asia and perhaps the world, the fact that its economy is rebalancing and maturing means other countries in region will have to pull up their socks.

Japan and Hong Kong are experiencing zero or sub-par growth.

“Japan’s aggressive monetary policy easing and bold fiscal stimulus are failing to jumpstart the economy and reviving inflation. This situation is exacerbated by appreciation of the yen and weak global demand,” says Torne adding that Prime Minister Shinzo Abe will have to launch the ‘third arrow’ of his reform plan in order to assure a sustainable growth trajectory in the future.

As far as Hong Kong is concerned, growth is lower than expectations, but the economy is shaping up remarkably better than at the outset of the year. The economy picked up momentum in Q2 2016, as GDP grew by 1.7% yoy, up from 0.8% yoy in Q1 2016.

“That said, the rebound in growth also came on the back of inventory accumulation, the impact of which will likely to fade in the absence of any meaningful pickup in demand over the coming months,” says Neumann.

Onus on India and Philippines

With other Asian countries slowing down, the baton for the world’s fastest-growing major economy is being passed to India. India is projected to rise up the ranks of the global economic league table, with economic expansion supported by favourable demographics and modernisation through reforms, says Cotter.

Adds Torne, “The government’s positive attitude towards economic reforms bodes well for the longer term growth trajectory and concrete steps have been taken to improve the business climate.”

However, growth remains lopsided across the economy and reducing stress on banks’ balance sheets is vital to boosting credit growth and supporting fixed investment, which was a weak spot in Q1 FY 2016, he says.

For Philippines, domestic demand is mainly driving growth performance.

“However, policy unpredictability associated with President Rodrigo Duterte could threaten the country’s healthy economic outlook. The Philippines will expand a strong 6.5% this year, overshooting last year’s 5.9% growth,” says Torne.

Asia losing its sheen

Despite Asia being called the main source of growth for the world economy, the fact remains that it is no longer growing at the expected pace.

“In a number of economies, debt continues to climb at a rapid clip. Meanwhile, whatever small lift came through on the external side is bound to quickly fizzle, with continued lacklustre demand in the West,” says Neumann.

“The region has lost some steam compared to the growth rates recorded in the aftermath of the global financial crisis. Weaknesses in the region are mostly related to the slow global economic recovery, which weighs on Asia’s all-important external sector. Domestic vulnerabilities have also played a role in Asia’s slowdown. These include Japan’s inability to tackle an ageing population and long-lasting deflation, and the slow implementation of economic reforms in China, India and Indonesia,” concludes Torne.

The post Things are finally looking up for Asia appeared first on International Finance.

Suparna Goswami Bhattacharya

July 28, 2016: Almost a month after the UK decided to exit the European Union, economists around the globe have come out with data suggesting that the referendum has had a mixed impact on the global economy with certain areas getting affected more than the others.

IHS Markit, a global insight company, in its report stated that Brexit will cut global economic growth by 0.1 per cent in 2016 and 0.4 per cent in 2017. Further, it will reduce growth in some of the world’s largest economies — UK growth to drop from 2.4 per cent to 0.2 per cent and Eurozone to drop to 1.1 per cent in 2017.

In the UK, it is expected to cause major economic and political uncertainty and will weigh down on business and household confidence and behaviour, thus dampening corporate investment, employment, and consumer spending.

Jaspreet Sehmi, senior economist, Dun & Bradstreet, feels that the UK economy is passing through the eye of a storm. With a new government at the helm trying to navigate the UK economy through previously unexplored territory, the journey ahead remains long and uncertain. “We expect the UK to enter a technical recession at some point between the second half of this year and the first half of 2017. Businesses are facing increased uncertainty, and anecdotal evidence suggests that firms are already scaling back investment and hiring plans,” says Sehmi.

In the Eurozone, the overall impact is likely to be negative, as any reduction in size of a single market makes it less valuable for those remaining in it. According to IHS Markit, the UK’s decision to leave will increase political instability and economic uncertainty in the Eurozone, weighing down on business and consumer confidence and activity. Additionally, Brexit has given momentum to other euro-sceptic political parties across the EU, some of whom also want a referendum on EU membership.

Tom Elliot, international investment strategist, deVere Group, says, “This makes it harder for governments to agree to a closer fiscal and political union which many economists believe is the call of the hour. This is illustrated by the difficulty in establishing a euro zone banking union.” Brexit is also likely to distract EU decision makers from core focus areas. The European Union should now be focusing on issues like the banking crisis (with Italian banks the current problem), migration, structural impediments to economic growth such as two-tier labour markets. These problems hinder EU’s ability to exert influence on the global stage, whether economically or politically, adds Elliot.

The Eurozone will also face a loss in competitiveness in manufacturing on the back of weaker GBP and increased uncertainty, potentially delaying investment decisions. “While sterling has remained weak, the swift formation of a new UK government has reduced volatility in financial markets, which should contain the negative impact on confidence going forward,” says Peter Vanden Hout, chief economist, Eurozone, ING.

The extent of the impact on Asia will largely depend on the outcome of the negotiations between EU and the UK. The principal transmission mechanisms of the Brexit shock to the region will come from trade, the financial sector and business confidence. Given the relatively small ties between the region and the UK, the shockwaves will reach Asia mainly via secondary channels.

Ricard Torne, head of economic research, FocusEconomics, says, “While shipments to the UK from Asia ex-Japan are relatively small (around 2.5%), those from the region to the Euro area are much larger and represent around 11% of the total exports. Therefore, the expected slowdowns in the Euro area following the Brexit vote, particularly in core countries such as Germany, will likely hurt Asia’s already-battered external sector.” Nevertheless, the impact on the region will be uneven. The countries which are more reliant on domestic demand, such as India, Indonesia and The Philippines, will weather the storm better than open economies like Korea and Taiwan. Financial hubs Hong Kong and Singapore will also feel the brunt due to heightened volatility in the financial markets, adds Torne.

Brexit will not impact US real GDP growth much in 2016, which is still forecast to be 1.9 per cent. “A relatively small proportion of US GDP growth comes from overseas trade, and the relative strength of the euro against the dollar year-to-date will offer American exporters some protection from any post-Brexit reduction in European investment spending and tourism,” says Elliot.

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