Weekly economic briefing: Asia set for faster growth in 2018 despite vulnerabilities

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Asia set for faster growth in 2018 despite vulnerabilities

The latest edition of Deloitte’s Voice of Asia series digs down into what’s likely to drive faster growth in Asia for 2018. Recent reforms, significant infrastructure spending, and strong global demand for products out of Asia are coming together to accelerate growth in the region this year.

Domestic conditions are well-placed to deliver growth. Recent major policy reforms across much of Asia, such as the introduction of goods and services taxes and the removal of fuel and other subsidies, have hurt consumer confidence and had short-term negative implications for business. But these effects are already wearing off, as are the impacts of India’s demonetisation, driving a pick-up in domestic demand via consumer spending – and boosting trade too. Many countries are also attracting higher levels of investment through business-friendly policy changes.

A strong pipeline of infrastructure spending initiatives is supporting short-term activity and long-term productivity. The largest infrastructure effort in the region is China’s “Belt and Road Initiative”. While still in its early stages, Asia’s biggest economy is looking to boost productivity and efficiency gains at home and across the region by improving trade links with Europe. Improved trade and transport links are expected to provide business opportunities in Asia as well as improve the movement of goods across economies and support business productivity in the long-term.

Continued recovery in global demand is providing greater impetus to the trade-driven economies of the region. There are encouraging signs of a recovery in capital spending worldwide, suggesting the global economy has turned a corner and will likely accelerate. Asian exporting economies stand to be the biggest beneficiaries of this recovery, as demand for their manufactured goods grows with increased capital spending in developed economies. Global financial conditions remain accommodating, capital flows into emerging markets and developing economies have returned, and non-resident capital inflows to the region remain resilient. The global economy seems set for a new investment cycle which will bolster the rebound.

But it’s not all positive – there are always potential risks and challenges.

The build-up of debt from the global financial crisis poses financial risks. Highly leveraged corporate and household balance sheets also remain a challenge in China, as they have left the non-financial private sector vulnerable to shocks. If left unchecked, a significant negative event, such as the continued escalation of geopolitical tensions or changes in the global trade regime (see below), could have far-reaching adverse consequences for economic stability in the region.

The most immediate financial risk is that 2018 sees a descent into a global trade war. The US administration’s policies towards the World Trade Organisation (WTO) and its approach to existing trade agreements have raised concerns. The decision by the United States to impose heavy tariffs on washing machine and solar panel imports, as well as newly announced tariffs on steel and aluminium, is a sign that the risk is real.

While these measures could end up harming both US consumers and producers in the region, such as in China and South Korea, the real concern is whether this then leads to retaliatory measures. Continued escalation, and the threat of a trade war could hit global market confidence and hinder the global recovery.

On balance, we expect Asia’s strengths this year to outpace its weak points. We are conscious of the sources of vulnerability and downside risks, as are policymakers in the region.But overall, the balance of evidence suggests that key drivers of growth are in place, and the most likely outcome for Asia in 2018 is stronger-than-expected economic performance.

 

For more information on the Australian brief, please contact co-authors David Rumbens and Adelaide Timbrell.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

The meaning of Mr Trump’s import tariffs

  • Donald Trump’s scepticism about free trade is longstanding and was a prominent feature of his 2016 presidential campaign. Such was the appeal of Mr Trump’s protectionist stance that his opponent and former free trade advocate Hillary Clinton found herself renouncing the Trans-Pacific Partnership she had once promoted.
  • The recent imposition of tariffs on imports of metals is Mr Trump’s latest attempt to deliver on campaign promises to shrink America’s trade deficit and ‘bring home’ manufacturing jobs. The US will impose import taxes of 25% on steel and 10% on aluminium. Mexico and Canada are exempt, a move which seems designed to strengthen America’s hand in the current negotiations over the future of the North America Free Trade Agreement (NAFTA).
  • The tariffs are ostensibly aimed at China, which the US administration believes is dumping excess steel and breaking World Trade Organisation (WTO) rules. But the US has invoked a different rationale for the imposition of tariffs, the little-used Article XXI of the WTO treaty, which allows tariffs to be imposed to protect national security. This rationale is questionable given that the tariffs will principally affect imports from allies including the EU and Japan, who are major exporters of steel to the US.
  • All this falls short of an all-out trade war. In macroeconomic terms the tariffs are relatively trivial, accounting for 2% of last year’s US imports, or 0.2% of US GDP.  Recent US history demonstrates that the imposition of tariffs does not lead inevitably to a trade war. Every US president since Jimmy Carter has imposed some form of trade barrier to try to protect jobs. In the 1980s President Reagan negotiated so-called voluntary export restraints with Japan to limit imports of steel and cars. George W. Bush implemented a 30% tariff on steel imports in 2002. These measures did not cause a spiral of retaliation or much disrupt the world trade order.
  • Three factors suggest that the risks are greater this time.
  • First, Article XXI of the WTO Treaty allows a nation to override the normal rules of the WTO by invoking national security, even when there is no evidence that exports are subsiding, sold below cost, or are surging. As The Economist has observed, “By appealing to national security, rather than making a case of the sort the court normally rules on, Mr Trump is blocking the mechanism that sanctions limited retaliation and thus stops trade wars blowing up”.
  • Second, previous administrations have applied tariffs, but they were initiated by presidents who were committed to free trade and the rules-based system that underpins it. Mr Trump’s position is quite different. In rhetoric at least he would count as the most protectionist US president since the 1930s. The risk is that US tariffs cause a tit-for-tat spiral of protectionism. The EU has said it will impose tariffs on a number of US products, including Bourbon, blue jeans and Harley Davidson, if the tariffs are not revoked.
  • Third, US grievances towards China are not without substance. The EU also believes that China is dumping excess steel on world markets and last August imposed provisional anti-dumping duties on Chinese steel. Nor is this just about steel. Given the scale and competitiveness of America’s tech sector, and its success in other major markets, it is perhaps surprising that the US scarcely runs a trade surplus in intellectual property (IP) with China. It is not only members of the Trump administration who believe that Chinese trade barriers have been a factor here. A report from the National Bureau of Asian Research put the annual cost of intellectual property theft to the US economy at $225-600 billion with China labelled “the world’s principal IP infringer”. The fact that the Chinese government has set targets for the share of its market that must be served by Chinese companies in rising industries, including supercomputers, autonomous vehicles and advanced medical devices, sits uneasily with a commitment to free trade. This week The Economist’s cover story entitled, ‘The Battle for Digital Supremacy’, provides a gripping account of the contest between the US and China.
  • Yet if China is the target, Mr Trump’s steel and aluminium tariffs are not the solution. China accounts for just 1% of US steel imports. As for US manufacturing, the supposed beneficiary of higher tariffs, it may well end up losing jobs. A Wall Street Journal survey of economists last week showed that most expected job gains in the steel and aluminium industries are to be more than offset by job losses in sectors that will have to pay more for imported steel and aluminium. This would be consistent with the effects of steel tariffs imposed by President George W. Bush in the early 2000s. The Trade Partnership, a US consulting firm, estimated that those tariffs led to almost 200,000 job losses in industries that rely on steel as prices rose. This is more than the entire workforce of 187,500 people employed in the steel sector at the time.
  • Whatever happens to the sector, the overall economic effects of the current trade measures will be small. Steel manufacturing today accounts for 85,000 jobs in a labour market of 192 million people. In the last 12 months the US economy has, on average, taken just 14 days to create 85,000 jobs.
  • Reflecting on the likely impact of tariffs on US jobs and their failure to address supposed Chinese trade infractions, it is hard not to conclude that Mr Trump’s low approval ratings and the looming mid-term elections in November may have played a role in their adoption.
  • On trade the real economic question is what happens next. The two events to watch for are the negotiations between the US, Canada and Mexico on NAFTA and the conclusions of a US investigation into China’s policies on intellectual property (IP).
  • Forthcoming US and Mexican elections mean that the negotiators have an incentive to reach an agreement in principle in the next couple of months. NAFTA seems likely to survive in an amended form, though this is by no means certain.
  • Things are moving on the US investigation into China’s approach to IP. Last week the Politico news site reported that Mr Trump wants, “to hit China soon with steep tariffs and investment restrictions in response to allegations of intellectual property theft”. These sorts of measures are likely to be on a greater scale than the tariffs on steel and aluminium, and more consequential.
  • Trade tensions between China and the US could be seen as inevitable as one super power adjusts to the rise of another. It is true that in the 1980s the US was engaged in an economic competition with the rising super power of the time, Japan. But Japan was a strategic ally. China is not. Today the US is locked in an economic and a strategic competition with China. For all the talks of bringing back jobs and protecting the steel industry, a more aggressive US approach to trade is part of a far wider geopolitical contest.

PS: In last week’s Spring Statement the UK Treasury announced a review on the future use of cash, leading to speculation that £50 notes and copper coins could be for the chop. After a brief campaign by the tabloids to “save the penny” the Prime Minister backtracked saying that the future of copper coins is secure. The rise in digital transactions and decline in the use of cash have got many central banks thinking about moving towards more digital currencies. Sweden’s Riksbank has floated the idea of introducing a digital-only currency, but the Bank for International Settlements has cautioned against this, saying it could allow swift and devastating “digital runs” on a central bank. In our recent briefing on the use of cash we noted the continued importance of physical money, and the vulnerabilities of relying on wholly digital currencies such as Bitcoin. This week Google followed Facebook’s lead in banning cryptocurrency adverts as part of a wider effort to protect users from fraudulent ads.

PPS: Our recent briefing on the UK consumer suggested that there is growing evidence that the labour market is tightening. The ONS Labour Market Flows data provide useful, and little noticed, clues as to the state of the UK jobs market. The latest data show that on a trend basis the number of people resigning from one job to move to another is at its highest level since 2001. Lower unemployment and a rising number of job vacancies seem to have emboldened people to change jobs.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended last week down 0.9% at 7,164.

International economic briefing by Ian Stewart

Economics and business

  • Unilever, one of the world’s largest consumer product firms chose Rotterdam over London as its HQ, but said no UK jobs would be lost
  • Singapore has been named the world’s most expensive city for the fifth year running, by the EIU
  • The US accused Russia of “nefarious” cyberattacks on US infrastructure as it unveiled a series of sanctions against the country
  • ECB president Mario Draghi said he wants to see more evidence of inflationary pressures before dropping crisis-era monetary policy support
  • Confidence among US CEOs hits a 15-year high in February following the Trump administration’s tax cuts and deregulation measures
  • The OECD upgraded their global growth forecasts for this year and next but warned that a rise in protectionism was a key risk
  • The Office for Budget Responsibility upgraded the UK’s economic growth forecast for this year to 1.5%
  • Donald Trump blocked Singapore-based Broadcom’s attempt to takeover US chipmaker Qualcomm saying it “threatened to impair national security”
  • Almost half of small UK businesses, up from a third in 2012 describe themselves as “permanent non-borrowers”, preferring to rely on savings
  • Payouts from trade credit insurers in the UK hit a nine-year high in 2017, reflecting increased pressure on supply chains and a rise in insolvencies
  • A quarter of UK bankers say their job is bad for their health, according to a survey by the Banking Standards Board
  • President Trump named Larry Kudlow, a TV pundit and former chief economist at Bear Sterns with conservative views, as his new principal economic advisor
  • Japanese wage pressures strengthened
  • US consumer sentiment rose to a 14-year high in March

Brexit and European politics

  • Exit polls on Sunday show Vladimir Putin winning the Russian election with 74% of all votes
  • France and Germany will draw up plans for EU reform within the next 3 months
  • EU negotiators accepted that the UK could sign trade deals whilst it remains in the EU customs union and single market during a Brexit transition period
  • Brexit is feeding UK business inertia, says Sir Charlie Mayfield, head of an industry group set up to improve corporate profitability
  • The European Commission has proposed a “digital tax” on the revenues of tech companies
  • Angela Merkel was sworn in for a fourth and final term as Germany’s chancellor
  • Germany’s new socialist finance minister, Olaf Scholz, vowed to continue the path of his austerian predecessor and stick to the balanced budget policy
  • The Institute for Government estimates that the UK will have spent about £2bn on Brexit preparations by the time it leaves the EU in March 2019
  • The EU recommended greater protection for temporary and part-time workers, including unemployment benefits and maternity leave

And finally…

A Romanian court rejected a man’s claim that he is alive, on the basis that he was officially registered as dead and he had appealed too late against the final ruling – dead man walking


Want to stay up-to-date?

Stay on trend and in the know when you sign up for our latest content

Subscribe