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#BCMeeting2019: Outlook for Global Trade
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Economy & Finance
Presentation provided at the Annual ICC Banking Commission Meeting by Joseph Zveglich on 10 April 2019.
International Chamber of Commerce - ICC
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#BCMeeting2019: Outlook for Global Trade
- 1
- Asian Development Outlook 2019 Towards a disaster-resilient Asia Joseph E. Zveglich, Jr. Deputy Chief Economist Asian Development Bank 2 Asian Development Outlook 2019
- Key Messages • Developing Asia’s growth to moderate to 5.7% in 2019 and 5.6% in 2020 amid weaker global demand and trade tensions • PRC moderation partly reflects efforts to control financial risks; India set to rebound as consumption strengthens • Inflation to remain subdued at 2.5% in 2019 and 2020 • The primary risk still centers on the trade conflict, with uncertainty heightened by protracted negotiations 3
- 6.0 6.2 5.9 5.7 5.6 6.5 6.6 6.4 6.2 6.1 5 6 7 8 2016 2017 2018 2019 2020 % GDP growth Developing Asia Developing Asia excluding NIEs Developing Asia's growth is softening, as prospects in advanced economies dim 4 GDP growth (%) 2017 Actual 2018 Actual 2019 ADO forecast 2020 ADO forecast Major industrial economiesa 2.3 2.2 1.9 1.6 United States 2.2 2.9 2.4 1.9 Euro area 2.5 1.8 1.5 1.5 Japan 1.9 0.8 0.8 0.6 a Average growth rates are weighed by gross national income, Atlas method. Sources: US Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov; Eurostat, http://epp.eurostat.ec.europa.eu; Economic and Social Research Institute of Japan, http://www.esri.cao.go.jp; Consensus Forecasts; Bloomberg; CEIC Data Company; Haver Analytics; ADB estimates. Source: Asian Development Outlook 2019 database. Forecast NIEs = newly industrialized economies of Hong Kong, China; Republic of Korea; Singapore; and Taipei,China
- Global trade and activity slowed and trade tensions escalated… 5 Global activity indicators PMI = purchasing managers’ index, PRC = People’s Republic of China, sa = seasonally adjusted, US = United States. Sources: Haver Analytics; CEIC Data Company.
- …which weighed on the region’s exports… 6 -30 0 30 60 Jan 2016 Jul Jan 2017 Jul Jan 2018 Jul % change, year on year Export growth, by product categories Nominal primary products Nominal manufactures -30 0 30 60 Jan 2016 Jul Jan 2017 Jul Jan 2018 Jul % change, year on year Import growth, by product categories Nominal primary products Nominal manufactures Primary products refer to food and live animals; beverages and tobacco; crude materials , inedible, except fuels; mineral fuels, lubricants and related materials; and animal and vegetable oils, fats and waxes. Manufactured goods refer to chemicals and related products; manufactured goods, classified chiefly by material; machinery and transport equipment; miscellaneous manufactured articles; and commodities and transactions not classified elsewhere in the SITC. Note: Refers to data for 10 developing Asian economies, namely, Hong Kong, China, India, Indonesia, Malaysia, PRC, Philippines, Republic of Korea, Singapore, Taipei,China, and Thailand. Source: Staff estimates using data from CEIC Data Company and Haver Analytics.
- …but domestic demand has supported the region’s growth 7 fy = fiscal year Notes: ASEAN = Association of Southeast Asian Nations; HKG = Hong Kong, China, IND = India, INO = Indonesia, KOR = Republic of Korea, MAL = Malaysia, NIEs = newly industrialized economies, PHI = Philippines, PRC = People's Republic of China, SIN = Singapore, TAP = Taipei,China, THA = Thailand, VIE = Viet Nam. Components do not add up to total due to a statistical discrepancy. Data for India are in fiscal years which covers the period 1 April to 30 March. Source: Haver Analytics (accessed 10 March 2019); ADB estimates. -4 -2 0 2 4 6 8 10 2017 2018 fy2017 fy2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 PRC IND HKG KOR SIN TAP INO MAL PHI THA VIE Percentage points Demand-side contribution to growth, selected economies Total consumption Total investments Net Exports GDP growth ASEAN-5NIEs
- 8 Developing Asia’s more open sub-regions will see more of a slowdown in 2019 Note: Red arrow= lower than the previous year. Green arrow = higher than the previous year. No sign = no change. Source: Asian Development Outlook 2019 database. 2018 2019 2020 2018 2019 2020 East Asia 6.0 5.7 5.5 South Asia 6.7 6.8 6.9 Hong Kong, China 3.0 2.5 2.5 Bangladesh 7.9 8.0 8.0 People's Republic of China 6.6 6.3 6.1 India 7.0 7.2 7.3 Republic of Korea 2.7 2.5 2.5 Pakistan 5.2 3.9 3.6 Taipei,China 2.6 2.2 2.0 Central Asia 4.4 4.2 4.2 Southeast Asia 5.1 4.9 5.0 Azerbaijan 1.4 2.5 2.7 Indonesia 5.2 5.2 5.3 Kazakhstan 4.1 3.5 3.3 Malaysia 4.7 4.5 4.7 Philippines 6.2 6.4 6.4 The Pacific 0.9 3.5 3.2 Singapore 3.2 2.6 2.6 Fiji 3.0 3.2 3.5 Thailand 4.1 3.9 3.7 Papua New Guinea 0.2 3.7 3.1 Viet Nam 7.1 6.8 6.7 Developing Asia 5.9 5.7 5.6 Excluding NIEs 6.4 6.2 6.1
- PRC moderation reflects both structural factors and policy tightening Supply-side contribution to growth Source: National Bureau of Statistics. Growth of broad money, total social financing, bank loans, and shadow banking Sources: People’s Bank of China; ADB estimates. 9.0 7.3 6.9 6.7 6.8 6.6 6.3 6.1 0 2 4 6 8 10 2010-2013 2014 2015 2016 2017 2018 2019 2020 Percentage points Services Industry Agriculture Gross domestic product Forecast 9
- In India, domestic demand remains strong and will be supported by policy easing going forward Years are in fiscal years which cover the period 1 April to 30 March.. Source: Asian Development Outlook database. Source: Bloomberg (accessed 6 March 2019). 7.4 8.0 8.2 7.2 7.0 7.2 7.3 -4 0 4 8 12 2014 2015 2016 2017 2018 2019 2020 Percentage points Private consumption Government consumption Gross capital formation Net exports Gross domestic product Forecast Demand-side contribution to growth 46 48 50 52 54 56 Jan 2016 Jul Jan 2017 Jul Jan 2018 Jul Jan 2019 Index expansion contraction Purchasing manager’s index, Manufacturing 10
- Stable food and fuel prices to keep inflation in check 11 Source: Asian Development Outlook 2019 database.Source: Bloomberg. 2.1 2.4 2.2 2.5 2.5 2.5 0 1 2 3 4 2015 2016 2017 2018 2019 2020 % Inflation and sub-regional contributions, developing Asia Central Asia East Asia South Asia Southeast Asia The Pacific Developing Asia 60 70 80 90 100 20 40 60 80 100 2015 2016 2017 2018 2019 2020 Index$/barrel Brent crude and food price Brent Crude Spot Price (left scale) Food price forecast (ADO 2019) Brent Crude Futures Price (12 February 2019) Food price index (right scale) Food price index (Annual average) Brent Crude (Annual average) 10-year average (2009-2018): 3.2% Forecast
- The greatest risk centers on prolonged US-PRC trade tensions, which heighten uncertainty Growth in the advanced economies and the PRC may slow by more than expected Rapid Fed hike less likely, but risk of financial volatility remains 12 Risks remain tilted to the downside Source: ADB staff estimates, based on methodology of Hlatshwayo (2018). 0 20 40 60 80 100 Jan 1995 Jan 1998 Jan 2001 Jan 2004 Jan 2007 Jan 2010 Jan 2013 Jan 2016 Jan 2019 Index US-PRC trade tension over IPR PRC WTO accession US-PRC trade tension PRC: Trade Policy Uncertainty Index, 1995-2019
- Summary • Developing Asia’s growth to moderate to 5.7% in 2019 and 5.6% in 2020 amid weaker global demand and trade tensions • PRC moderation partly reflects efforts to control financial risks; India set to rebound as consumption strengthens • Inflation to remain subdued at 2.5% in 2019 and 2020 • The primary risk still centers on the trade conflict, with uncertainty heightened by protracted negotiations 13
Editor's Notes
- Good morning. Let me begin by summarizing the key messages of the report. First, growth in developing Asia will slow to 5.7% in 2019, and to 5.6% in 2020. Exports are slowing as global demand softens and as trade tensions persist. Second, the region’s largest economy, the People’s Republic of China, will see continuing growth moderation. This reflects both structural factors and continued efforts to reduce financial risks. Growth in the second-largest economy of India is set to pick up, as supportive policies boost consumption. Third, inflation will remain subdued at 2.5% in 2019 and 2020, as oil and non-oil commodity price pressures are muted. Fourth, in a cloudy outlook the primary risk still centers on the trade conflict, with uncertainty heightened by protracted negotiations. Finally, this report’s theme chapter on “Strengthening Disaster Resilience” documents how disaster risk and costs are rising, and Asia is particularly vulnerable. Resilience under natural hazards requires further strengthening.
- Despite rising headwinds, regional growth slowed only slightly, from 6.2% in 2017 to 5.9% in 2018 <blue line, left panel>. One of these headwinds is a slowdown in advanced economies. As you can see in the RHS table, aggregate growth in major industrial economies of the United States, Euro area, and Japan moderated slightly to 2.2% in 2018 from 2.3% in 2017 <right panel, top row>. With trade tensions persisting and growth in the People’s Republic of China (PRC) continuing to moderate, regional growth will soften further to 5.7% in 2019 and to 5.6% in 2020 <blue line in the shaded area, left panel> Excluding the newly industrialized economies, growth will slow from 6.4% in 2018 to 6.2% in 2019 and 6.1% in 2020 <red line in the shaded area, left panel>.
- The slowing of global trade and economic activity is partly a cyclical phenomenon, as the expansion in the advanced economies has been going on for several years. But it also coincided with the escalation of trade tensions between the US and the PRC <shaded box on the right> The dashed vertical lines correspond to key tariff escalation dates in the ongoing trade conflict. The green line shows year on year growth in world trade volumes, which after strengthening in 2017 started plateauing in 2018, with a sharp decline towards the end of the year. The red line refers to the global composite purchasing managers’ index, or PMI; and the blue line refers to global manufacturing PMI. Positive numbers are associated with expansion, and negative numbers with contraction. These forward-looking proxies for global economic activity both moved downward through 2018.
- These rising headwinds dampened regional exports in 2018, despite a strong start. Exports in the region’s economies <left panel> posted solid growth in 2018, but could not beat the stellar rate of 2017 in this weakening environment. By year-end exports contracted slightly. Economies that saw export growth slowdowns in 2018 were those most dependent on the electronics cycle (semiconductor cycle), particularly the newly industrialized economies and Southeast Asia. Imports, on the other hand, saw very high growth rates in 2018 even compared to 2017, particularly in commodity-importing countries <right panel> Addendum: The series refers to trade data in US$ terms for 10 developing Asian economies, namely, PRC, India, Republic of Korea, Singapore, Hong Kong, China, Taipei,China, Malaysia, Philippines, Indonesia, and Thailand. % Share to Total Exports for Developing Asia (2018): 92.4% % Share to Total GNI (Atlas Method) for Developing Asia (2017): 93.3%
- Despite the softening external environment, developing Asia still posted good growth because domestic demand remained strong. On average, consumption <orange bars> contributed 3.7 percentage points to overall growth in 2018, up from 3.4 percentage points in 2017. Investment <grey bars> picked up and provided an impetus for growth in some economies [such as Indonesia, the Philippines, and Thailand], but it was a drag in other countries [such as Korea and Malaysia]. The growth contribution from net exports <blue bars> was negative in 7 of the 11 countries in the sample, partly reflecting declining export growth but also rising imports due to higher oil prices and increased investment.
- Slower demand growth from advanced economies and PRC will lower growth for developing Asia from 5.9% to 5.7% in 2019 and further to 5.6% in 2020. Looking at growth by sub-regions <starting from the top left column>, we see that the more open and outward-oriented economies are those which will slow more in 2019: East Asia will see moderating growth across the board, as PRC neighbors’ exports are also affected by the trade conflict. Intermediate trade (about 80% of total) should continue to languish over the first half of the year, as slower growth from PRC weighs over the horizon period. Southeast Asia’s growth will moderate slightly to 4.9% in 2019 and 5% in 2020. For 2019 the spillover from the trade conflict weighs on all countries, though this is offset by public investment increases in the Philippines, and also in Indonesia in 2020. Malaysia should see a trade-related recovery in 2020. <Turning to the top right> South Asia is expected to grow the fastest, bolstered by strong growth in India and Bangladesh. Pakistan’s external financing problems will weigh in on that country’s growth, however. Central Asia’s growth will fall slightly to 4.2% in 2019 and 2020 amid lower oil prices, although Azerbaijan’s output will recover more than expected amid increased natural gas production. In contrast, the Pacific region is now projected to expand to 3.5% in 2019 and 3.2% in 2020 as repair work on the LNG terminal damaged by the early 2018 earthquake in Papua New Guinea is complete (PNG is about 70% of the Pacific)
- Growth in the People’s Rep. of China continued to moderate from 6.8% in 2017 to 6.6% in 2018, in line with the government’s growth target of around 6.5%. Continued moderation in the PRC can be attributed to structural factors, but also to policy tightening to rein in vulnerabilities. As the Chinese economy matures, growth will naturally slow. There is also an ongoing structural shift away from industry <blue bars, left panel>, whose contribution to growth has declined, toward services <yellow bars, left panel>. As for policies, tightened regulations led to a contraction in shadow bank financing <right panel, green line>, which slowed growth in outstanding social financing – a broad measure of credit – from 13.4% in 2017 to 9.8% in 2018 <right panel, red line>. Housing market restrictions and tighter fiscal policy in the first half of 2018 also restrained growth. Looking ahead, growth will moderate further to 6.3% in 2019 and 6.1% in 2020 as restrictions on housing markets and shadow banking continue, and as the trade conflict with the US weakens exports.
- In contrast, in India, growth slowed from 7.2% in fiscal year 2017 to 7.0% in fiscal year 2018, with agriculture subdued and consumption curtailed somewhat by higher global oil prices and lower government expenditure. On the demand side, private consumption was the main driver of growth in FY 2018 <blue bars, left panel>. It is likely to have received an impetus from the reduction in GST rates across a wide range of commodities during the year and a cut in key monetary policy rates. Gross fixed capital formation <grey bars, left panel> grew by a robust 10% in FY 2018, which was sustained by government push. Indeed, central government’s capital expenditure grew by a robust 20.3% on the back of infrastructure investments. Looking ahead, growth is expected to rebound to 7.2% in 2019 and 7.3% in 2020 as policy rates are cut and farmers receive income support, bolstering domestic demand Manufacturing production's outlook is quite positive <right panel>. Since mid-2018 the PMI has shown continued improvement in India, hitting a 14-month high in February 2019. *************************NOTES**************************** The Purchasing Managers’ Indexes (PMI), is a forward-looking indicators of the manufacturing sector’s health.
- Turning now to inflation, a rise in oil prices in 2018 <left panel, red line> along with depreciation in a number of economies contributed to a slight uptick in inflation last year, to 2.5%. Looking forward, Brent crude oil prices are expected to stabilize at lower levels, while food prices <blue line> will increase only slightly in 2020. These muted commodity price movements, along with policy rate tightening that occurred in several economies in the region last year, will keep inflation firmly anchored in developing Asia as a whole, at 2.5% in 2019 and 2020. <right panel> This is firmly below the 10-year average of 3.2%. <dotted line in right panel> ******************************** Note: year to date, the average Brent crude oil price is at $62/barrel and the last reading (as of March 21th) is of $65/barrel
- In a cloudy outlook, the risks remain tilted to the downside. The primary risks still center on the US-PRC trade conflict. Uncertainty is heightened by protracted negotiations and disagreements, which could curtail investment and growth in the region. The report uses indicators based on the number of news articles that mention trade policy uncertainty, and which capture the degree of uncertainty that the public perceives about trade policy. The chart on the right, which shows trade policy uncertainty for the PRC, shows that this indicator was high in 1995 during a US-PRC conflict over intellectual property rights, and was also elevated in the late 1990s and early 2000s when the PRC was in the process of joining the World Trade Organization. It started rising again in 2017 and 2018 and is now at an all-time high. ADB analysis indicates that periods of high trade policy uncertainty can have significant negative effects on investment. A possible upside risk to the outlook is that negotiations readily bring agreement and low trade barriers, as both sides have shown willingness to come to an agreement. Beyond the trade conflict, growth in the advanced economies and the PRC may slow by more than expected if Brexit is disorderly, for example, or contention flares over fiscal policy in the US. This could spill over into the rest of the region. Finally, one risk that has subsided relative to our assessment last year is the risk that the US abruptly raises the policy rate. However, emerging market currency and asset markets could become volatile as in 2018 so monetary policy-makers in the region must remain vigilant.
- Good morning. Let me begin by summarizing the key messages of the report. First, growth in developing Asia will slow to 5.7% in 2019, and to 5.6% in 2020. Exports are slowing as global demand softens and as trade tensions persist. Second, the region’s largest economy, the People’s Republic of China, will see continuing growth moderation. This reflects both structural factors and continued efforts to reduce financial risks. Growth in the second-largest economy of India is set to pick up, as supportive policies boost consumption. Third, inflation will remain subdued at 2.5% in 2019 and 2020, as oil and non-oil commodity price pressures are muted. Fourth, in a cloudy outlook the primary risk still centers on the trade conflict, with uncertainty heightened by protracted negotiations. Finally, this report’s theme chapter on “Strengthening Disaster Resilience” documents how disaster risk and costs are rising, and Asia is particularly vulnerable. Resilience under natural hazards requires further strengthening.
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