Deutsche Bank Notes Asian Economy Strong Based On Exports

The outlook from Asia is strong, Deutsche Bank’s economists note, as they wonder in a monthly regional report is this “As good as it gets?” The Asian economy, while displaying signs of strength, is also the subject of flashes, the report notes.

 

It is exports that drive the Asian economy

Asian exports have rebounded sharply in the first quarter of 2017, in part dispelling the negative notion that the export engine had suffered a structural break. The “Asian export puzzle” is the primary performance driver behind higher growth forecasts in the region, Deutsche Bank’s Asian Economics research team notes in an April 7 report.

Looking at Asia one sees an idiosyncratic picture of regional nuance, from strong growth momentum in China and Hong Kong to bottoming inflation in Indonesia and improving political risk in India while the economy is on the mend in Thailand.

But amid this positive past performance backdrop, concerns appear on the horizon. With the US potentially carrying out a trade review in the region and North Korea representing a troubling fly in the economic ointment, future growth is not as solid a given as one might expect. On March 31, President Trump signed two executive orders to review the US trade deficit and strengthen anti-dumping rules and enforcement, a point of “apprehension,” particularly among North East Asian economies.

“The Korean authorities did not rule out the possibility of Korea being labeled a currency manipulator, while the Central Bank of China (CBC, Taiwan) has taken pains to avoid such a labeling, noting that had not intervened in the FX market and that Taiwan’s trade surplus with the US would fall significantly if the arms deal were approved,” the report observed.

Overall, however, the Deutsche Bank research team of Diana Del-Rosario, Juliana Lee, Michael Spencer, Li Zeng and Zhiwei Zhang don’t think the US trade review will necessarily weigh on global trade. “We think that if it focuses on ensuring adherence to international norms, rules and agreements, its efforts would then be positive for global trade,” they wrote. However, there are concerns.

Commodity prices pulling back and currency risks with “upside inflation surprises” hinting at earlier than anticipated central bank rate hikes, the look at the economy with a degree of trepidation.

Trade war is a key concern in the region

With US GDP growth at 2.6% and the Euro Area at an anemic 1.3%, China’s strong reported 6.5% growth rate is coming as the People’s Bank of China is engaging in mini-hikes that are targeting the non-banking sector and attempting to raise interest rates off the floor so as not to prick the property bubble. The property bubble is a risk in the region as it is getting larger amid strong infrastructure spending and property investment that continues to increase.

In Hong Kong, growth is expected to improve further on a recovery in export demand as the US review of trade policies could be positive for the region if it leads to liberalization with China. But concerns are that the issue could be taken too far, resulting in an “aggressively protectionist stance” that would be “very negative news.” Another risk for the one-time British colony is that tourism growth proves elusive.

In India, the appreciation of its currency and rise in the equity markets is a result of favorable state election outcomes and fiscal management. Mother nature, in the form of a potential summer monsoon, could result in risks to growth and food inflation, which are concerns.

The Philippines is a strong region as well, as Deutsche Bank revised up its 2017 and 2018 growth forecasts to 6.2% and 6.5%, respectively, with exports surprising to the upside. Singapore, likewise, is buoyed by strong exports while in South Korea exports are strong but internal demand is a weakness.