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

September 26, 2016: Though talks of the adverse after-effects of Brexit have been going on for a while, things have not been as bad for the country as was predicted, at least for now. In fact, the adverse impact in the short term has been lesser than initially feared.

Markus Kuger, Senior Economist, Dun & Bradstreet, expects the British economy to continue to grow throughout the 2016-18 period as the underlying pillars of growth remain intact.

“At the moment, the British economy is more price competitive in global markets, thanks to the depreciation of the pound. Hence, it does not come as a surprise that businesses selling abroad are doing well. However, the fact is that UK currently is still in the EU and if it were to lose access to EU markets, the introduction of tariffs and other regulations could counterbalance this development,” he says.

The UK economy will get a further boost on the policy front from the Bank of England (BOE). The BOE’s move to cut back interest rate alongside reviving quantitative easing and other measures will help the economy chug along for a while, says Howard Archer, Chief European and UK Economist, IHS Global Insight. “On the fiscal front, some stimulus measures will likely be announced later in 2016 now that the government has dropped its plans for a fiscal surplus by fiscal year 2019/20. This could include increased infrastructure spending,” remarks Archer.

In fact, London continues to enjoy its position as the preferred destination for businesses. A recent study by PwC states that London has maintained top spot as a centre for business, finance and culture — widening its lead over 30 international cities. London’s success is consistent across all of the indicators — city gateway, economic clout, intellectual capital and innovation categories, and technology readiness. There are ample reasons why London will not relinquish its financial hub status overnight. These include English language, the time zone, the pro-business and well organised regulatory environment, a relatively stable economy, efficient transport infrastructure, office space availability and its cosmopolitan and desirable lifestyle.

However, experts warn that the ambiguity surrounding the new rules and regulations post Brexit is hampering London’s image. “Financial services companies can’t afford to wait for negotiations to complete. They have to plan their strategy to develop their European operations,” opines Nigel Green, founder and CEO, deVere Group. There is a fear among UK banks of losing their passporting rights, which will mean that they would need individual country licences in order to operate in the EU.

While large scale redundancies are not expected, there will definitely be gradual downscaling in London with expansion occurring in Frankfurt, and the new emerging hubs like Dubai. Negotiations are also not expected to settle soon.

“The EU refuses to hold informal talks before Article 50 is invoked and negotiations won’t begin until early next year. Both the UK and EU will have two years of limbo with the outcome largely unknown,” says Kuger.

Article 50 of the Lisbon treaty sets out how an EU country might voluntarily leave the union.

There will also be vast political uncertainty with the parliamentary elections due in France, Germany and Holland, to name just a few.

Kuger adds that the EU will not allow the UK to have their cake and eat it too. The situation for the EU is easy – access to the single market is impossible without the UK agreeing to free movement.

“The UK on the other hand faces a tough balancing act: they cannot have access to the single market while also restricting migration. While it’s in the EU’s interest to maintain and continue trading with the UK, the EU holds the upper hand in the upcoming negotiations,” feels Kuger.

The EU is transparent in saying that you can’t cherry pick between passporting rights and free movement of labour. If the UK does not want unlimited migration from the EU, it cannot have financial passporting rights.

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