Monthly: Four ways Asian growth can bottom in 2H19

July ends on a high note for financial markets, but Asian trade data remain weak. For growth to bottom out, four developments need to play out:
Taimur Baig, Nathan Chow26 Jul 2019
  • (i) More tangible signs of China‚Äôs demand stabilisation
  • (ii) A bottoming out of global electronics demand
  • (iii) Less despondency with trade war and more getting-on-with-it by manufacturers
  • (iv) Stable exchange rate dynamics around Fed and ECB policy easing
Photo credit: AFP Photo

Can strong markets pull up the real economy?

Expectations of monetary accommodation by the Federal Reserve and the European Central Bank have been a strong tonic for financial markets in July. With 2Q earnings numbers and June dataflow from the US also supporting bullish sentiments, global markets have been in a sweet spot, rallying across the board, notwithstanding weak manufacturing and trade data out of Europe and Asia.

Asia’s trade figures, after suggesting a bottom in April/May, have turned weak again. June exports have been disappointing with so far, with China, India, Indonesia, Singapore, and South Korea reporting weaker outturns than the previous month. But some other trade markers have fared better. The Baltic Dry Freight index, for instance, has had an excellent July. Along with some pickup in commodity prices, there are some reasons to expect that a better set of numbers could be the characteristic of 2H19.

We are somewhat optimistic that between the supportive US dataflow and buoyant financial markets, trade and growth will pick up worldwide. We are keeping an eye on four developments for a constructive 2Q:

More tangible signs of China’s demand stabilisation. Our Nowcasting model is pointing at stable demand in China in 3Q, despite headwinds from weak trade and poor sentiments. Credit growth, freight movement, and retail sales will shed light on the stabilising dynamic, in our view. Supportive measures from PBOC will help.

A bottoming of global electronics demand. Between uncertainty about 5G rollout due to trade war and a weak product pipeline, the global electronics cycle has been undergoing a lean patch. There could be some turnaround in parts demand as new products are introduced later this year.

Less despondency with trade war. As tariffs and tweets lose their shock value, we expect managers of multinational companies to just get on with this new environment (re-route, re-brand, diversify sourcing, raise prices, increase productivity).

Stable exchange rate dynamics. Unless President Trump goes the length of instructing the US Treasury to intervene in the FX market by selling USD, low rates worldwide should ensure low currency volatility. That would help keep capital flows orderly and add to the narrative of a stronger second half of the year.

Taimur Baig

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Taimur Baig, Ph.D.

Chief Economist - G3 & Asia

Nathan Chow

Strategist - China & Hong Kong

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