A FULL-FLEDGED trade war between the United States and China could take Asia's average gross domestic product growth 2 percentage points lower on a cumulative basis through 2020, "even with easier monetary and fiscal policies", Deutsche Bank Asia economists said in a May 6 note. This is about half the impact they forecast for the US, China, and the Eurozone.
Over the weekend, US president Donald Trump's threatened to raise the current 10 per cent tariff on US$200 billion of imports from China to 25 per cent on Friday.
Although the Deutsche Bank economists still believe the remaining US$325 billion of US imports from China will likely escape higher tariffs, they estimated the potential impact on Asian economies if this is proven wrong and a full trade war scenario materialises.
"Earlier this year, we identified the risk of the US imposing a 25 per cent tariff on all imports from China and on automobile imports from Europe as the only plausible scenario in which the US economy could be in recession this year or next," said the economists.
In such a scenario, US GDP would be lower by more than 2 per cent over the 18 months following the imposition of such tariffs, taking US GRP growth negative. The Eurozone would also fall into recession, while China's growth would slow.
While the impact on other Asian economies would be serious, "developed Asian economies would likely suffer more than the low-beta emerging economies, given their higher export sensitivity", said the economists. Hong Kong and Taiwan would see the largest cumulative cuts to growth rates of 3.9 percentage points and 3 points respectively.
For the Asean markets, the estimated potential effects through 2020 vary from less than 1 percentage point off growth for Indonesia, to close to 3 percentage points cumulatively for Thailand and Singapore.
The scenario envisaged is that initially, slower export growth would likely come alongside a withdrawal of foreign portfolio capital, putting downward pressure on exchange rates to the dollar. But weaker currencies would then depress import demand, and current account balances would start rising, eventually ending the sell-off in Asian currencies.
The economists expect that Indonesia and the Philippines would see the greatest adjustment to their currencies, followed by South Korea, and most economies will apply monetary stimulus.
"While Asean economies are likely to rely more on monetary policy than on fiscal policy to support growth, we think Indonesia and the Philippines would likely have to hike rates initially to support their currencies. We expect that they would then cut rates aggressively as current account balances improve and their currencies stabilise," said the economists in their note.
"In contrast, given their relative fiscal health, developed Asian economies may be able to provide greater fiscal support, albeit their responses would not save their economies from suffering at least a technical recession ahead."
The economists noted, however, that this scenario is not yet their base case.