Amid slowing economies, what are India and rest of Asia doing

Singapore City: The world markets have recently been taken on a roller coaster ride by the President of the world’s largest economy. They have been bobbing up and down, depending on his unpredictable pronouncements on Twitter.

More specifically, the resolution of the US-China trade dispute seems to be following an unending cycle of optimism followed pessimism with no certainty that it will be solved anytime soon.

Over the years, the world has become a more and more connected place. Trade has brought countries closer and increased overall global wealth faster than ever before. The 74 years since the Second World War has arguably seen the longest period of relative global peace ever in history. One significant reason is that many countries have found a common purpose in elevating the standard of living of their citizens by trading and have much to lose if they settled disputes by force.

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However, trade growth is slowing. The World Trade Organisation (WT)) economist said that due to rising trade tensions and increasing economic uncertainty, they expect global merchandise trade volume to grow by 2.6 percent this year down from 3 percent in 2018. This is well below the 10-year average of 3.8 percent. Weak import demand in Europe and Asia was cited as the reason for lower global trade volume growth. They, however, said that trade growth could be restored to the 3 percent level in 2020 but cautioned that trade tensions pose the greatest risk to this forecast.

The overall effect of his uncertainty is causing economic growth to stagnate in many countries, investments to falter, and people to fear for their jobs.

Although the US-China trade war has a large part to play in this, some economists have observed that Asian and European economies were already entering a cycle of decelerating growth even before the first salvo was fired between the two largest economies in the world.

In Asia, Hong Kong and Singapore which are among the most open economies in the world appear to be hardest hit by the trade war although they are not affected by tariffs.

Financial hub Hong Kong is not only grappling with the slowdown in China but also political unrest. GDP contracted 0.4 percent in Q2 when compared with Q1. Singapore fared worse recording a GDP decline of 3.4 percent in Q2. Economists are expecting both economies to be pushed into a technical recession, defined as two consecutive quarters of negative GDP growth.

Just last week, a British research and analytics firm, Oxford Economics said that economic growth in Southeast Asia will ease to 4.5 percent this year compared to 5.1 percent in 2018. The latest round of tariffs and trade restrictions imposed by the US and China was quoted as the main reason for the slowing growth. This is especially impactful on the export-oriented economies of Singapore, Thailand, and the Philippines. Malaysia and Vietnam appear to have weathered the slowdown better with steady domestic demand and export growth which has slowed less than other countries in the region.

So how are Asian countries responding and coping with their slowing economies?

Central banks in Southeast Asia are anticipated to reduce interest rates in order to boost domestic demand following the lead of the US Federal Reserve Bank. Oxford Economics also predicted that fiscal policy will also likely become more supportive amid higher infrastructure investment.

Singapore’s central bank, the Monetary Authority of Singapore (MAS) is expected to announce in October that they will be easing monetary policy as the Singapore economy is expected to enter a technical recession. Instead of using interest rates, MAS adjusts liquidity by buying or selling the Singapore dollar to adjust the currency against an undisclosed basket.

In neighboring Indonesia, the central bank cut its benchmark seven-day reverse repo rate last week by 25 basis points (bps) to 5.25 percent, its third straight cut. The Philippines central bank, Bangko Sentral, is also widely expected to cut rates by 25 bps to 4 percent when it meets on 26 September. Similarly, Thailand and Malaysia are expected to lower rates by 25 bps by early 2020.

Growth in the world’s second-largest economy, China, slowed to 6.2 percent in Q2, the slowest pace in 27 years. Although growth has been slowing for some time, the tariffs imposed by Washington on billions of dollars of Chinese goods affecting some 20 percent of the country’s exports is exacerbating the situation. For 2019, the government is targeting growth of between 6 percent and 6.5 percent.

China has taken various steps this year to support the economy, including tax cuts and infrastructure spending.

Just last Friday, China trimmed its new Loan Prime rate, the reference rate for banks to price loans to 4.2 percent for one-year loans, down from 4.25 percent in August. The five-year lending rate was left unchanged at 4.85 percent.

In South Korea, which is highly dependent on electronics exports, the government introduced a huge spending package to nudge the economy into positive territory in Q2. Despite that, GDP growth in the three months to June only inched up 1.1 percent compared with the previous quarter when the country faced its steepest economic decline since the global financial crisis. The central bank reacted by cutting rates for the first time in three years in July.

Asia’s third-largest economy, India saw quarterly GDP growth drop to a six-year low of 5 percent in Q2, amidst slowing domestic spending and investments. This is the fifth consecutive quarter of GDP growth reduction. This year, India’s central bank has already cut rates four times leaving the benchmark rate at close to a decade low.

Last week, in a move to boost spending and shore up investment, Finance Minister Nirmala Sitharaman unveiled a cut ineffective corporate tax rate to 25 percent. The stock market reacted positively to the move with the benchmark S&P Sensex stock index climbing over 4 percent after the announcement.

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