Phase One prompts Asia growth forecast upgrade by Asean+3 unit

Singapore

MACROECONOMICS surveillance organisation Asean+3 Macroeconomics Research Office (AMRO) has upgraded its growth forecast for Asia, just a month after its previous prediction, thanks to the signing of a Phase One trade deal between the United States and China following nearly two years of dispute.

AMRO projects full-year growth for the Asean region, China, Japan and South Korea to hit 4.9 per cent in 2020, its chief economist Khor Hoe Ee said at an outlook briefing on Friday. This revision comes just a month after the last projection, made in December, predicted a 4.7 per cent growth.

"The important thing is that without Phase One, you would have had the tariffs on Dec 15," Dr Khor said, when asked if the truce made a real difference to the trade war. "The other is, of course, the reduction in tariffs on the ones that were imposed in October." He added that this is significant enough for AMRO to raise its growth outlook.

He was, however, less rosy about a Phase Two deal, describing it as a "black hole", even though he said a "Phase 1.5" deal could be a possibility if the US and China achieve enough to come to some agreement.

He said many observers consider Phase Two to be "difficult" as it involves commitments that China "would have difficulty delivering". In addition, they are expecting negotiations to continue after the US presidential election, scheduled for Nov 3.

"Our view is that we should be cautiously optimistic because the election and Phase One provide breathing space for everyone, so take advantage of this time to consolidate, do structural reforms and build up capacity," Dr Khor said.

According to AMRO data, aggregate regional exports fell sharply in early 2019 as a result of the US-China trade war. While regional exports of goods by volume headed into negative territory, that for services remained positive, albeit at a low level. He is hopeful of a recovery. As for share of imports into the US, China lost 1.3 percentage points of the share, while Asean, Japan and South Korea collectively gained 0.9 percentage points.

Meanwhile, the Global Policy Uncertainty Index remains high, even after Phase One has concluded, Dr Khor noted.

He said this is why, on a global risk map that AMRO publishes on an ad hoc basis to assess the likelihood and impact of various risks, an "escalation in global trade tensions" remains a short-term high-impact risk, even though its likelihood was downgraded from "high" to "medium" in November.

Other downside risks include a sharper-than-expected slowdown in the US, eurozone and Japan, increasing geopolitical risks which could destabilise oil prices as well as prolong low interest rates.

Singapore is particularly prone to movements on the uncertainty index, Dr Khor said, due to the open nature of its economy.

Every one percentage point increase in the uncertainty index results in a 0.53 percentage-point contraction in real gross domestic product for Singapore, AMRO estimates. This is the highest in the region; Hong Kong is a distant second with a 0.28 percentage-point contraction for every one percentage point shift in the index.

Due to the external headwinds, Dr Khor said there is room for central banks to adopt more accommodative monetary and fiscal policies, but they would need to maintain tight macroprudential policy to safeguard growth and financial stability.