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Trade-tension risks not hurting regional growth forecasts

Economists say these risks haven't yet hit growth forecasts for Singapore and the region

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As trade tensions between the United States and China continue - more tariffs are due Friday - economists are putting numbers to the downside risks of a global trade war.

Singapore

AS TRADE tensions between the United States and China continue - more tariffs are due Friday - economists are putting numbers to the downside risks of a global trade war.

Yet these risks have not hit growth forecasts for Singapore and the region; some countries are even having their forecasts upgraded.

In a note on Tuesday, DBS Group Research chief economist Taimur Baig said: "It may still be unlikely, but given the global dynamic, it is time to consider the downside scenarios around a full-blown trade war."

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Such a situation, defined as all goods traded between China and the US being subject to tariffs of 15 to 25 per cent, could shave off a quarter of a percentage point from GDP growth in 2018, and more than half a percentage point from 2019 growth, he said.

"This would set off a major global chain reaction. Given their trade openness and exposure to the electronics supply chain, there will no respite whatsoever for Malaysia, Singapore, South Korea and Taiwan in this tail risk scenario."

DBS predicts Singapore's growth this year to be 3 per cent, with a downside risk of 0.8 percentage points.

On Tuesday, research house Schroders downgraded its global growth predictions due to factors such as trade tensions, a weak start to the year, higher oil prices and rising inflation. Its forecast for 2018 was lowered from 3.5 per cent to 3.4 per cent, and for 2019, from 3.3 per cent to 3.2 per cent.

But economists elsewhere, while aware of trade risks, are not downgrading their forecasts per se.

UOB economist Ho Woei Chen acknowledged that trade tensions and further US interest rate rises could increase capital outflows from emerging markets, which may weigh on the growth outlook for Singapore and the region.

But he said: "Our positive macro-economic outlook for the third quarter of 2018 remains intact and we expect to see global growth of just below four per cent this year."

In its H2 2018 Global Outlook Report on Monday, OCBC's forecasts for 2018 growth in regional economies are largely comparable to or higher than the forecasts made in the previous report last December.

OCBC economist Selena Ling is sticking to a 3 per cent forecast for Singapore's 2018 GDP growth, although she sees a potential 0.3 percentage point hit if downside risks materialise. Deutsche Bank set out two sets of projections for trade-war risks in a report last Friday. In a "trade war light" scenario, with the negative growth impact on the US and China limited to 0.2 percentage point, the impact on emerging markets in Asia is estimated to average 0.1 percentage point, assuming 0.1 percentage point in fiscal support.

In a "trade war heavy" scenario, where growth in China and the US falls 2.5 percentage points, the impact in the region is expected to average 1.5 percentage points, with 0.8 percentage point in fiscal support.

These risks, however, have not dampened Deutsche Bank's regional growth forecasts. Said chief economist for the Asia-Pacific Michael Spencer: "The more negative the news on trade policies, the greater the downside risks to Asia. At this stage though, we have not seen fit to lower forecasts based on recent news."

On the contrary, Deutsche Bank revised up forecasts for some Asian economies recently, including Thailand last month and Singapore in May.

Bank of America Merrill Lynch's global growth numbers "are largely intact" after its recent mid-year review. Said its Asean economist Mohamed Faiz Nagutha: "The trade situation remains very dynamic in my view.

"Our baseline forecast assumes only modest further escalation in the months ahead, which is the main reason our growth numbers have seen little revision."

Economists note that the trade spat has rocked markets but not yet made an impact on the region's real economy. CIMB Private Bank economist Song Seng Wun, who has not made a downward revision to growth forecasts for that reason, added that production and export growth are still supportive of the current forecast.

Maybank Kim Eng economists Lee Ju Ye and Chua Hak Bin have not lowered their forecasts for Asean growth, apart for the forecast for Malaysia - due to a more sluggish investment outlook, with the review of infrastructure projects after its change of government.

Furthermore, while countries plugged into global supply chains - such as Singapore and Malaysia - may be hit by a full-blown trade war, Asean could actually benefit from diversions in trade, services demand and investment, they added.

Asia-Pacific ING head of research and chief economist Rob Carnell said trade tensions have instead hit central bank forecasts - and this, together with more competitive currencies locally, have supported growth forecasts.

"Certainly, a further intensification of the trade mess that's unfurling will keep our Asian growth forecasts on permanent watch for downgrade," he said. But he noted the opportunities, such as China's opening up of sectors to trade and investment.

READ MORE: Higher oil prices and threat of trade wars to dampen global growth