Asia – A tug of war on stability amidst receding risks

Key points

  • 2019 is set to finish on a soft note, driven by both external and domestic weakness.
  • Regional growth is likely to stabilise in 2020, with a US/China trade truce and policy stimulus roughly offsetting slower global demand.
  • Policy easing will continue, although the room for both further monetary and fiscal stimuli is limited.


Asian economies were doing well until a softening in Chinese demand and the US/China trade war started in 2018. Since then, growth has slid, with 2019 set to end on a soft note due to weaker external demand and domestic headwinds. We expect growth in Asia (excluding China) to drop to 4% in 2019 from 4.9% in 2018, alongside waning inflation and a more relaxed policy environment.

External softness continues

External shocks have again been the main reason for this year’s growth decline. But instead of a financial crisis – as we saw in 2008 - or a synchronised trade recession as in 2015, it is a combination of a deceleration in China’s growth and a trade war between the world’s two largest economies. These resulted in significant contagion for Asia’s exports (Exhibit 1).

Exhibit 1: External weakness to remain as a drag


Source: CEIC and AXA IM Research, as of Dec 2019


In the near term, there are a few tender green shoots following the recovery of the mini tech cycle and hopes for an interim trade deal. Not only have the new export orders sub-indices of the Purchase Managers' Index (PMI) stopped declining, export growth to major markets - such as China and the Eurozone - has also stabilised. With China and the US now working towards a ‘phase one’ deal, potentially halting further tariff increases, the lingering impact from the trade war may fade into 2020.

While our Asian exports monitor[1] (Exhibit 2) suggests stabilisation is taking place, it also shows export growth is staying at a depressed rate, on a par with 2016. Although the trade truce could bring some positive momentum in the near term, we think the extent of the trade recovery could be limited by the anticipated slowdown in the US, China and Eurozone for 2020 and 2021.

Exhibit 2: Asian exports monitor suggests near-term stabilisation


Source: CEIC, Bloomberg and AXA IM Research, as of Dec 2019


Mixed domestic picture

Besides the direct impact on trade, the tariff war has also had a negative spill-over effect on domestic manufacturing sectors. The level of impact has varied depending on the degree of openness of each economy. Manufacturing growth in trade-sensitive economies - such as South Korea, Taiwan and Singapore - has suffered more than in those that are domestically-oriented in nature, including India, Indonesia and the Philippines.

A similar discrepancy can also be found in the labour market, where manufacturing and non-manufacturing employment growth have diverged since late 2018. The decline in the former coincided with tariff implementations. Looking ahead, a long-lasting trade truce could help to restore corporate confidence, which could lead to a recovery in manufacturing capex and hiring. But we don’t expect the upswing to be particularly vigorous, considering slower economic growth for developed markets and China. For global manufacturing, the winter may have passed - but the spring rebound is likely to be tepid.

While manufacturing weakness is partly caused by externalities, domestic consumption has also shown signs of softness. Overall private consumption’s contribution to growth has moderated to 2.2% from 2.9% in 2018, with the automobile sector being the main drag. Fortunately, policy supports have stepped up, with central banks easing monetary policy and some governments announcing fiscal packages to lift domestic growth. In addition, Asia’s imports – an indicator of domestic demand – have shown a strong correlation with China’s economic cycle, which could hit a bottom in 2020 (Exhibit 3).

Exhibit 3: Domestic demand may be bottoming out


Source: CEIC, Bloomberg and AXA IM Research, as of Dec 2019. ECI = Economic Cycle Indicator (of China)


Policy support easing continues at a slower pace

Against the weak economic backdrop, policy-makers across the region have increased policy support with both monetary and fiscal measures. Despite a surge in food prices, the broader inflation picture has remained benign. South Korea in particular saw headline Consumer Price Inflation (CPI) dip below zero in the third quarter for the first time in almost 60 years. Elsewhere, CPI readings are also at multi-year lows. Even among the higher inflation economies - such as India, Indonesia and the Philippines - price pressures have remained subdued. We expect the soft growth trend to contain the price pressure going forward (Exhibit 4).

Exhibit 4: Price pressure to remain benign


Source: CEIC and AXA IM Research, as of Dec 2019. PPI = Producer Price Inflation


Moderate inflation and broad currency stability - due to the weakening US dollar - should extend the loose policy environment in most Asian economies in 2020. In fact, Asian central banks have delivered sizeable easing in 2019, of up to 100 basis points (bps) and 135bps in Indonesia and India respectively. However, we think room for further significant stimulus is limited by three factors. First, Asia is known to have a debt problem. Although the debt-to-GDP ratio is still much lower compared to the average of developed markets, the speed of debt accumulation has been fast. Second, the US Federal Reserve is taking a breather from the current easing cycle and more rate cuts are unlikely until late 2020. Third, the potential interim trade truce is expected to arrest near-term uncertainties and spur some recovery in confidence and growth, reducing the need for the same level of stimulus seen in the past 12 months.

While central banks’ monetary actions are likely to become more confined, fiscal policy could take over as a bigger support. South Korea, India and Thailand have so far been most aggressive in proposing fiscal stimulus. The South Korean government announced the largest fiscal stimulus since the last financial crisis. In India, a corporate tax cut together with other policy boosts - amounting to around 0.6% of GDP - were launched as an attempt to break the negative feedback loop. As for Thailand, in response to the country’s economic woes, the Thai Cabinet approved a THB ฿31bn wide-ranging stimulus package to boost domestic demand.

Although we don’t have fiscal clarity on all economies, it appears that governments are willing to do more of the heavy lifting through fiscal means as conventional monetary policy is approaching its intrinsic limit. Looking ahead, while a continued global economic deceleration will weigh on Asia’s macro outlook in 2020, we think the receding trade war impacts and a more forceful policy stimulus will provide some offset, leading to stabilised growth of 4% in 2020 and 2021.

[1] Shen, S. Yao, A. (2019) “Tracking Asian exports” AXA IM Research and Strategy Insights, April 2019