Asia Macro Insight:Risks to Asia's resilience

DeutscheBankResearch Asia Economics AsiaMacroInsight Date 28May2024 RiskstoAsia'sresilience AsiaremainedresilientinQ1,withtwo-thirdsoftheeconomiesreportingGDPgrowthstrongerthanconsensusforecasts.AlthoughtheregionisbenefittingfromanexportrecoveryledbyAIchipsthisyear,thereareincreasingriskstoitsgrowthpathbeyond2024.Indeed,theupcomingUSelectionscouldbethemostconsequentialpoliticaleventforAsiaindecades,astheycouldmarkthebeginningofgenuineglobalfragmentation.WhiletheUShasreduceditsdirectimportsfromChina,China'sexpansionofitsglobalfootprinthasraisedconcernsandscrutinyoftheroleofthirdmarkets.WhiletheUShasoptedforsignificanttariffrates,thesehavebeenappliedonlytoselectedChinesegoods.However,theUShasalsocalledfora"strategic"and"unified"frontagainstChina's"industrialovercapacity"astheEUinchesclosertohikingtariffratesonselectedgoodsfromChina. Asourbaselineassumptiondoesnotincludebroader,significanttariffratehikes,intheeventtheserisksactuallydomaterialize,weseeAsianexportscontractingnextyear,notexpandingaccordingtoourprevailingbaselineview.Ironically,though,increasinganticipationoftariffratehikesand/orothertraderestrictionsmayseethisyear'sexportgrowmorestronglythanexpectediffirmsopttopreemptivelystockpile,albeitwithanegativepaybackin2025,whilelimitingtheirinvestmentsandstrengtheningtheirfinancialbuffersinstead. Thisriskarrivesatarathersensitivetime,asAsiafacesahighwallofmaturingdebt.AnexternalshocklikethiswouldlikelyseearenewedsurgeinFXvolatility,raisingthebarforratecutsbytheregion'scentralbanks.Aswenotedinanearlierreportfrom2022,Asia'smostsignificantvulnerabilityrelativetoitsEMcounterpartsisitshighdomesticdebt,althoughthesituationregardingitsexternalandsovereigndebtriskshasfaredbetter.Despitenarrowingcreditspreads,monetarytighteningsince2022hasleftrefinancingcostshigher,callingforvigilanceoverfinancialstabilityrisks,especiallyinthefaceofpotentialgrowthshocks. ThisreportcontainsadetailedanalysisoftheAsianeconomiesunderourcoverage. JulianaLee ChiefEconomist +65-6423-5203 YiXiong,Ph.D.ChiefEconomist +852-22036139 KaushikDasChiefEconomist +91-22-71804909 JunjieHuangEconomist +65-6423-6699 DeyunOuResearchAssociate Regionalview2 China8 India12 SKoreaandTaiwan16 ASEAN18 AppendixA23 Asiaeconomicandfinancialforecasts.24EMAsiamacrocharts25 EMAsiamonetarypolicymonitor27 Distributedon:28/05/202400:55:06GMT DeutscheBankAG/HongKong IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.MCI(P)041/10/2023.UNTIL19thMARCH2021INCOMPLETEDISCLOSUREINFORMATIONMAYHAVEBEENDISPLAYED,PLEASESEEAPPENDIX1FORFURTHERDETAILS. 7T2se3r0Ot6kwoPa TopriskstoAsia'sresilience Asiakickedoff2024onarelativelypositivenote,faringbetterthanotherEMs,withtwo-thirdsoftheeconomiesreportingQ1GDPgrowthstrongerthanconsensusforecastsasexportsrebounded. JulianaLee,ChiefEconomist,APAC Figure1:Asia'sgrowthvs.otherEMs' Figure2:Asia'sexportsvs.otherEMs' 25 20 15 10 5 0 -5 -10 -15 -20 %yoy EMAsiaLatam EMEA 0708091011121314151617181920212223 40 30 20 10 0 -10 -20 %yoy EMAsia LATAM EMEA 0708091011121314151617181920212223 Source:CEIC,DeutscheBankresearch Source:UNCTAD,DeutscheBankresearch Moreover,Q1datasupportedourearlierexpectationthatAsia'sgrowththisyearwillgetanextraboostfromeconomiesthatexportAIchips(ie,SouthKoreaandTaiwan,bothofwhichsawanotableimprovementinthecontributionofnettradetogrowth). Figure3:Asia–Q1GDPandexports Figure4:Korea'sandTaiwan'sexportsledbyAIchips GDP 7 6 5 4 3 2 1 0 -1 -2 -3 Q1GDP,%yoy NettradecontributionExportscontribution(rhs) Consensus 14 12 10 8 6 4 2 0 -2 -4 -6 TAVNPHCHIDMASKHKSGTH 400 350 300 250 200 150 100 50 0 -50 -100 %yoy3mma Koreasemi TaiwanDataprocessor 0911131517192123 Source:CEIC,DeutscheBankresearch Source:CEIC,DeutscheBankresearch Asiahasweatheredtheimpactofrisinggeopoliticaltensionsandtraderestrictionsrelativelywell.Thatsaid,theimportanceofAsia–andChina–inglobalsupplychainsandtradehasdeteriorated.GlobaltradeasashareofGDPhaslargelymovedsidewaysastheglobalsupplychainhasadjusted.ButwhileChina'sshareinUS (direct)importshasfallen,itsleadingroleasaworldexporterhasnotchanged. Figure5:Tradeintervention Figure6:Growthbydemand 1,600 1,400 1,200 1,000 800 600 400 200 0 harmful liberalizing 091011121314151617181920212223 80 Globaltradeas%ofGDP Exportsofgoodsandservices(%ofGDP) 60 40 20 0 19701975198019851990199520002005201020152020 Source:GlobalTradeAlert.org,DeutscheBankresearch Source:IMF,WorldBank,DeutscheBankresearch Whilethenumberofharmfultraderestrictionshassurgedinrecentyears,tariffratehikeshaveonlymadeupabout9%ofthetotal.Subsidies(excludingexportsubsidies)havedominated,accountingforabout40%ofthetotal,followedbycontingenttrade-protectionmeasures(~16%)andexportcontrolsandsubsidies(~14%).AlthoughtheactualimpactwillbelessthanapercentagepointincreaseintheUS'seffectivetariffratesonChina,tariffratehikesonselectedgoodssuchasEVs(byfourtimesto100%)weresignificant.AccordingtoourEuropeancolleagues,theEUCommissionisalsolikelytohikethetariffrateonChineseEVs,albeitbyjust10-20%,fromtheprevailing10%