This year has been generally good for developing Asian nations. Their economies have demonstrated resilience to external events, inflationary pressures have receded and growing foreign investment inflows have boosted future growth prospects. However, next year’s prospects are murky.
Worsening trade frictions could depress Asian exports and trigger wider financial and economic turbulence. The Chinese economy has been another concern: while signs are emerging of a modest rebound there, it is not clear how sustained it will be. Asian policymakers will have to respond forcefully to support economic growth.
A new administration will take office in the US in January. While the exact shape of President-elect Trump’s policies remains unknown, there are some things we can be reasonably sure of.
We could see a period of tit-for-tat trade restrictions in 2025
Higher tariffs
One is that high tariffs will be implemented against mainland China, while a more modest universal tariff might be imposed on all incoming imports. Mainland China, the European Union and Mexico have all warned that they will retaliate if such tariffs were to be imposed. While negotiations will eventually be conducted to resolve disputes, the likelihood is that we could see a period of tit-for-tat trade restrictions in 2025 before such an agreement is possible.
The implications are not difficult to discern: slower growth and higher inflation. Higher costs will depress import demand and raise inflationary pressures in the US and elsewhere, so the US central bank will probably not be able to cut interest rates as much as hoped. Going by what happened after Trump’s first-term tariff hikes against mainland China, the Chinese yuan could suffer another fall. With trade conflicts creating greater uncertainty, consumer and business confidence will suffer. The result would almost certainly be slower capital spending as we saw in 2018-19, when tariffs were first used aggressively.
The most likely outcome will be a period of uncertainty and slower overall growth
On the other hand, the new administration’s likely tax cuts and deregulation would support economic growth and corporate profitability in the US, which is why US equity markets have soared. However, it does not seem that government spending will be reduced in proportion to the tax cuts. The result could well be wider fiscal deficits and higher bond yields. The latter would raise borrowing costs and potentially hurt demand. In the longer term, confidence in the US dollar could also be hurt if the trajectory of the public debt situation is seen as unsustainable.
Period of uncertainty
Overall, the most likely outcome will be a period of uncertainty and slower overall growth in the world economy – to the detriment of export-dependent Asian economies.
Since the end of September, the authorities in Beijing have significantly expanded support measures for the economy. Substantial help is on the way to arrest the downward pressures instigated by a contracting real-estate sector. Interest rates have been cut, incentives have been offered for households to spend on upgrading their consumer appliances, and local governments have been given more funds to spend on infrastructure.
The data for October show that this effort is paying off; retail sales have picked up smartly and new-home sales have started to grow again after a long period of decline. Business expectations have also recovered modestly.
The trouble is that this improvement will not be sustained if aggressive protectionism abroad depresses Chinese exports. However, Beijing has shown a great determination to ensure that its growth ambitions are achieved. Should US tariffs threaten growth, it is likely that policymakers will ramp up stimulus measures to protect the economy.
Downside risks
Even with some possible silver linings from pro-growth measures like tax cuts and deregulation in the US and stimulus in China, there is little doubt that the downside risks for Asia will intensify.
Policymakers in the region are likely to take proactive measures to protect their economies
Policymakers in the region are likely to take proactive measures to protect their economies. While it would be tempting for Asian central banks to cut rates aggressively, they will have to move cautiously as their currencies are likely to be under more pressure if the Chinese yuan were to depreciate further.
The burden will fall on fiscal measures to support growth and more lucrative incentives for foreign investors to relocate production to the region. Policymakers will also seek to strengthen long-term fundamentals by investing in better infrastructure, improving education and promoting regional integration.
In the face of such a challenging year for the region, it will be countries where effective policy counter-measures can be speedily implemented that do better than others.
