• US-China: Conclusion of Phase One trade deal reduces uncertainties ahead
• Signs of stabilization in the Chinese economy
• Central banks meeting this week - keep rates on hold

US-China: Conclusion of Phase One trade deal reduces uncertainties ahead

Risk sentiment generally stayed on a strong footing last week as investors heaved a sigh of relief after the US-China phase one trade deal was finally signed. In line with the announcement made before Christmas, the US will refrain from increasing tariffs further and will also halve the 15% rate introduced on circa USD120bn of imports in September 2019 to 7.5%. However, the 25% tariff on USD250bn of imports will remain in place indefinitely. In return, China has pledged to increase imports from the US by USD200bn over the next two years (benchmarked against 2017 import levels) with some 20% coming from agricultural goods, 40% from manufacturing and the remainder from energy and services. China has also agreed to provide US firms with greater access to some sectors of its economy and to increase protection around intellectual property. Existing tariffs on US goods will however remain in place.

A full resolution to this conflict is reportedly not an option until after the next US Presidential election in November 2020 and will also depend on China’s willingness to make further changes to economic policy and regulation. Moreover, the reduction in tariffs under stage 1 is conditional on China achieving the USD200bn increase in imports from the US over 2020 and 2021, which will prove very challenging. As a result, the remaining tariffs will likely remain in place through to at least the end of 2021 and, during this time, a further escalation of tensions will remain a risk.

Overall, the Phase One trade deal reduces the uncertainties for global trade but is unlikely to catalyse a strong rebound in growth, particularly for China, since the bulk of the US-China tariffs will remain in place. There was no further rollback in tariffs other than earlier announced. US will maintain its 25% additional tariff on USD250bn of Chinese goods while China imposes additional tariffs on around USD110bn of US goods.

Signs of stabilization in the Chinese economy

The Chinese economy grew by 6.0% yoy in 4Q19, unchanged from 3Q19 growth while qoq SA growth edged higher to 1.5% from 1.4% in 3Q19. For 2019, the Chinese economy decelerated to 6.1% yoy from 6.6% yoy in 2018, in line with expectation but within government’s target of 6.0-6.5%. By industry segments, secondary industry growth rebounded to 5.8% yoy in 4Q19 from 5.2% in 3Q19 and primary industry growth picked up to 3.4% yoy from 2.7% in 3Q19. However, the slowdown in tertiary industry growth to 6.6% (3Q19: 7.2%) which is the lowest on record has cast a cloud on the outlook. Tertiary industry accounts for 54% of the economy and is expected to become an even more important growth driver as China’s economy matures. For the whole of 2019, primary industry grew 3.1% (2018: 3.5%), secondary industry grew a marginally slower 5.7% (2018: 5.8%) and tertiary industry slowed the most to 6.9% (2018: 7.6%).

Meanwhile, December economic data supports a stabilizing outlook in China. Of note was the strong rebound in industrial production (IP) growth to 6.9% yoy (Nov: 6.2%), strongest in nine months. Fixed asset investment (FAI) picked up to 5.4% yoy YTD (Nov: 5.2%), tracking stronger manufacturing activities while retail sales growth held up at 8.0% yoy in December (Nov: 8.0%).

The synchronized recovery in these keenly watched higher frequency indicators has injected some optimism into the economic outlook for 2020. The outlook of China’s growth in 2020 will hinge on whether China’s infrastructure investment is able to reaccelerate, which may require further support from both monetary policy and fiscal policy. With USChina trade tensions now lessened, in addition to continued stimulus support from the PBoC, we continue to expect China’s economic growth to slow further in 2020 due to the structural reforms and ongoing supply chain diversification. We are maintaining our growth forecast for 2020 GDP growth at 5.9%

Upcoming Key Economic Releases

Central banks meeting this week - keep rates on hold

The debates on how much of an impact the Phase One trade deal will have on the global outlook will continue as market concerns fall on the Davos forum and central bank rate decision. Reduced trade noise should bring some calm to the markets. There are few central bank meetings, but we do not expect them to disturb the calm.

• Bank of Japan Policy Decision (21 Jan)

The Bank of Japan (BoJ) held its main policy rate steady at -0.10% at its December 2019 policy meeting, and outlined its rules for the ETF lending program, which was first announced in April. The BoJ sounded a bit more upbeat on the global economy and noted that the domestic economy has been showing “a moderate expanding trend”. Left with no policy ammunition, Japan's central bank is probably banking on USD120bn of fiscal stimulus announced in December to soften the impact of the recent consumption tax hike. We expect the BoJ to keep policy rates unchanged in their January meetings, especially now that a fiscal easing package has been announced to counter a slowdown in the economy.

• Bank Negara Malaysia MPC (22 Jan)

BNM kept OPR unchanged at 3.0% at its last Monetary Policy Committee (MPC) meeting on 5 Nov 2019. Instead, BNM resorted to cut the statutory reserve requirement (SRR) by 50 bps to 3% effective 16 Nov 2019. Risks to domestic growth are still skewed to the downside amid lingering external headwinds and policy uncertainties, which may cap any improvement in investment. We still do not rule out a possible OPR cut. There’s heightened probability of a rate cut by the BNM in 1H20, given the prevalent state of uncertainty in both the global and domestic economy. In this respect, we are still of the view that BNM will likely cut its key policy rate by 25bps to 2.75% in 2020 in order to support economic growth that is still facing downside risk.

• Bank Indonesia Decision (23 Jan)

Bank Indonesia (BI) kept its 7-day Reverse Repo Rate stayed unchanged at 5.00% in its December 2019 monetary policy meeting, while maintaining the Deposit Facility rate and Lending Facility Rate static at 4.25% and 5.75%, respectively. BI reiterated that the decision is consistent with low inflation expectation and efforts to support the domestic economic growth amidst the global growth slowdown. Subdued inflation and the strengthening currency have opened doors for more BI easing to promote investment drive. We expect BI to keep its accommodative monetary policy stance to support growth recovery but the cut may not come in January

• Bank of Canada Overnight Rate Decision (22 Jan)

We look for the BoC to leave rates unchanged at 1.75% in January where the policy statement and MPR will be monitored for signs of a pivot away from the Bank’s cautious optimism on the outlook.

• ECB Policy Decision (23 January)

At its final monetary policy announcement for 2019, the European Central Bank (ECB) held monetary policy steady as expected, and made minimal changes to its economic projections. Since its December meeting, incoming data have been relatively more stable. December headline inflation was the strongest since April 2019 and the threemonth average of core inflation edged higher to the strongest pace since 2015, an encouraging sign for the ECB. Meanwhile, retail sales rose more than expected in November and industrial data were sturdy. We continue to anticipate rates to remain unchanged and therefore, the ECB meeting should be a non-event. No new economic projections are published and the board’s risk assessment is unlikely to change compared to the December outlook.

The rest of Asia’s notable data:

• South Korea 4Q19 GDP (22 Jan)

• Thailand December trade data (22 Jan)

• Philippines 4Q19 GDP (23 Jan)

• Singapore December CPI (23 Jan)

• Singapore December industrial production (24 Jan)

The key economic releases to watch for developed economies:

• World Economic Forum's Annual Meeting in Davos (20-24 Jan)

• US housing data (22 Jan)

• UK employment report for November (21 Jan)

• Germen ZEW survey for January (21 Jan)

• Eurozone consumer confidence for January (23 Jan)

• Japan December trade data (23 Jan)

• Japan December CPI (24 Jan)

Source: BIMB Securities Research - 20 Jan 2020