ADB Cautioned the Downside Risks of Trade War to Global Economy

In the latest update of the Asian Development Outlook (ADO), Asian Development Bank (ADB) lowered its 2018 GDP growth outlook projection for Asean to 5.1% compared to its previous projection of 5.2% in April’s ADO report (5.2% in 2017) due to “moderation in export growth, softer domestic demand, subdued agriculture, higher inflation, net capital outfow and worsening balance of payments”. However, while cautioining the global trade war and the serious downside risks to the global economy, ADB is maintaining its Asean’s GDP growth projection at 5.2% for 2019, unchanged from April’s ADO. In the immediate term, ADB highlighted that Southeast Asia and the newly industrialised economies may benefit in the medium term “when trade is redirected within global supply chains to economies producing similar goods”. However, ADB cautioned that the ongoing trade war, if prolonged, could cause disruption to production units as overseas business networks may be severed and investment plans cancelled amid a reallocation of global production.

Slower growth in 2018 is anticipated in Indonesia, Malaysia and the Philippines. In contrast, Thailand’s 2018 GDP projection was revised upwards by 0.5 percentage points to 4.5% (4.0% in April’s ADO 2018), supported by strong external and domestic demand amid buoyant consumer sentiment as well as the public infrastructure development program. Singapore’s GDP growth forecast was maintained at 3.1% in 2018 (3.6% in 2017), where tighter monetary policy anticipated in response to the 4.2% GDP growth registered in 1H18, as well as cut in public expenditure on security, external relation and economic development will likely cap growth in 2H18. In Indonesia, 2018 GDP growth was lowered to 5.2% from its 5.3% projection in April’s ADO 2018 report, where the continued monetary policy tightening to ease pressure on the country’s balance of payments is expected to weigh on aggregate demand. As for the Philippines, its 2018 GDP was lowered to 6.4% compared to 6.8% previously, driven by expectations of weaker expansion from agriculture sector, softer export growth and tighter monetary policy amid faster inflation. Slower export performance and weak domestic investment are expected to be a drag on Malaysia’s growth in 2018, leading to a revision downwards to 5.0% from 5.3% previously.

Separately, on the monetary front, Bank Indonesia (BI) raised its policy rate (7 days reverse repo rate) for the fifth time this year by 25bps to 5.75%. So far this year, the policy rate has been hiked by a total of 150bps. BI noted that the decision to raise rates was in line with ongoing efforts to lower the current account (CA) deficit to 2.5% of GDP in 2019. In 2Q18, the CA deficit widened to 3.0% of GDP in 2Q18 (-2.2% of GDP in 1Q18), its largest deficit since 3Q14. Meanwhile, Bangko Sentral ng Pilipinas (BSP) also hiked its policy rate (overnight reverse repurchase facility) by 50bps to 4.5%, making this its fourth rate hike in 2018 thus far as BSP expects supply-side forces to continue to fan inflation upwards in the coming months. Inflation in August continued to accelerate to a nine-year high of 6.4% yoy.

Source: Affin Hwang Research - 28 Sept 2018