‘Worst may be over for growth slowdown in Asia’

MANILA, Philippines — While economic growth may still remain fairly weak over the coming year, the worst may be over for countries in Emerging Asia as supply chains are aligned in response to the trade war and demand firms up in less open economies, said London-based Capital Economics. 

In a recent brief, the macroeconomy research firm said loosening monetary policy in countries fuelled by consumption and investment – like the Philippines – are expected to aid in recovery. 

“For all the bad news on the global economy recently, it looks as if GDP growth across Emerging Asia held broadly stable last quarter. Although growth is likely to remain fairly weak over the coming year, with fiscal and monetary policy being loosened, we think the worst is now over for most countries,” said Capital Economics. 

The escalation of the trade war between US and China has been hurting the economies of major exporters in the region. 

In regional economies with strong industrial policies, there is evidence that Vietnam and Taiwan are benefitting from the trade war as US demand shifts away from China towards alternative supplies, Capital Economics said.

“A further escalation of the trade war between China and the US is likely to act as a headwind, but the impact is unlikely to be as severe as is commonly assumed,” it said. 

Capital Economics said  the expansionary fiscal policy in other countries in the region would contribute to sustained recovery in growth. 

“Domestic demand has also weakened steadily over the past year, but policy loosening should ensure that it now starts to recover. Fiscal policy has been loosened over the past year across most of the region. Indeed, over the past week alone Thailand, Hong Kong and the Philippines have all announced expansionary budgets or fiscal stimulus packages. The relatively healthy fiscal positions of most countries in the region means fiscal policy is likely to remain supportive,” said the company.

“Interest rates are also being cut. So far this year the central banks of India, Korea, Thailand, China, the Philippines, Indonesia and Malaysia have cut interest rates. With inflation likely to remain subdued, we think policymakers in these countries will cut again before the end of the year,” it said.

The Bangko Sentral ng Pilipinas (BSP) implemented another 25 basis point rate cut early this month in response to the dismal second quarter growth performance. 

Capital Economics said that while growth across Emerging Asia is expected to remain subdued over the coming quarters, most countries will register steady improvement in economic output. 

“Putting all this together, although we expect growth to remain weak over the coming quarters, we do think the worst is now over and that most countries will record a very gradual recovery. The IMF and other private-sector forecasters are anticipating a much stronger improvement,” it said. 

The country’s economic growth slowed down further to 5.5 percent in the second quarter  largely due to  diminished government spending as a result of the delayed passage of the 2019 national budget. 

To prevent another slowdown, Congress, now composed of a large majority of President Duterte’s allies, have committed to pass the 2020 budget on time. 

“The government shouldn’t have any problems getting the budget through Congress. The 2019 budget was delayed by nearly five months, which led to planned spending increases being postponed, causing growth to slow sharply. But after May’s mid-term elections, the Senate is now packed with the supporters of the president,” said Capital Economics.