Trade war could hamper growth, says Asian Development Bank

Robust domestic demand in Asian economies underpins expansion

US president Donald Trump has levied tariffs of 10 per cent on $200 billion (€170 billion) of Chinese products, which is due to increase to 25 per cent by the end of the year. Photograph: iStock

US president Donald Trump has levied tariffs of 10 per cent on $200 billion (€170 billion) of Chinese products, which is due to increase to 25 per cent by the end of the year. Photograph: iStock

 

Rising trade tensions remain a threat to economic growth in Asia, the Asian Development Bank said in its latest report, but the Manila-based lender still expects economic growth in the world’s most populous continent of 6.0 per cent this year, slipping to 5.8 per cent next year.

“The main reason behind this downward revision is the escalation of trade tension between US and China, ” Yasuyuki Sawada, chief economist of the Asian Development Bank, told The Irish Times in an interview.

Stable growth in developing Asia is down to robust domestic demand, buoyant oil and gas prices, and India’s economy gaining pace.

“Across Asia in the major economies we see domestic consumption as well as domestic investment, both private and public, seems to be playing a key role to support continued economic growth,” said Mr Sawada. “The trajectory for India seems to be healthy so we expect strong growth, at 7.3 per cent for 2018 and accelerating (to 7.6 per cent) for 2019 as the temporary effects of the demonetisation of large banknotes and the introduction of the national goods and services tax abate as expected.”

Greater inter-regional trade between Asian countries can do much to offset the possible impact of trade conflict between the US and China.

“In terms of goods and services trade, around half of these exports of goods and services by Asian countries are inter-regional. In terms of financial transactions, Asia is a big generator of growth and more than 60 per cent of global growth is now produced by Asia,” said Mr Sawada.

Tariffs

The US and China’s trade conflict continues to escalate. US president Donald Trump has levied tariffs of 10 per cent on $200 billion (€170 billion) of Chinese products, which is due to increase to 25 per cent by the end of the year. China has imposed around $60 billion (€51 billion) worth of tariffs in return. Previous to a fresh round of tariffs on Monday, the two sides had applied taxes of around $50 billion (€42.5 billion) on each other’s goods.

One challenge for Asian economies is to keep investment within the continent - more than 70 per cent of savings in Asia are invested outside of the continent.

Solid domestic consumption and rapid expansion of the services sector helped buoy the Chinese economy, but a challenge facing China is corporate debt, mainly related to the state-owned enterprises, and which is running as high as 156 per cent of gross domestic product, while local governments have racked up large debts on infrastructure investments.

“The main issue is risk the insolvency of debt that might undermine the health of the financial sector. The Chinese government has been quite aware of this risk and has set a high priority on this,” said Mr Sawada.

China is still rebalancing from an export-driven economy to a domestic demand-driven economy.

With over half the world’s middle-class population now living in Asia, rising property prices are a challenge, while other risks include financial shocks if the Fed needs to raise interest rates faster than currently expected to stave off inflation.

The forecasts came in an update of the ADB’s flagship annual economic publication, Asian Development Outlook (ADO) 2018.