Q1 economy signals a brightening outlook

Mar 19, 2017 06.00PM |
 

by Jason Tan

THE first quarter of 2017 is nearly behind us and the global economy seems to have also put its travails behind itself. The world economic outlook is indeed brightening and the world is set for a rosier rest-of-2017.

World trade flows, after a sluggish recovery since the financial crisis of 2008, are increasing steadily; the falls in commodity prices are also likely to be over, putting an end to fears that the world economy may be in deflation mode. Manufacturing in various large economies stands at multi-period highs, driven by rising exports.

This economic upswing on a global level is primarily supported by an accelerating American economy. The United States (US) has certainly taken its time to get back to its feet after the debilitating sub-prime mortgage crisis and its aftermath. The US Federal Reserve’s recent hiking of the Fed Funds Rate – the policy rate which is used as a reference for interest rates worldwide – by 0.25 percentage points in March reflects burgeoning confidence in the US economy.

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The American acceleration is ably supported by a nascent revival in the other large, advanced economies, namely, the Eurozone and Japan. China – a source of global uncertainty in 2015 and 2016 – has also embarked on a path of lower but more stable and high quality growth. This has had the effect of injecting impetus into the global economy through trade and investment flows.

East Asia, including Asean countries, has benefited from the export turnaround and will enjoy greater economic gains in the year ahead. Export-oriented economies such as Singapore, Malaysia, Thailand and Vietnam will be outsized winners from the resurgence of the G3 bloc and the consequent boost to global trade flows. Even Indonesia and the Philippines will stand to gain from the increased demand for raw materials and other commodities.

This will come as a relief for economies in general as we put behind us the unsettling episodes of the recent past such as the oil price collapse in late-2014, the Chinese stock market crash in mid-2015 and subsequent fears about dwindling foreign reserves as capital outflows fled from China, Brexit and the election of Mr Donald Trump to the presidency in the US.

However, there remain salient risks which could upset the applecart.

First, US President Trump’s fiscal policies remain largely unknown. He has mooted a trifecta of deregulation, corporate tax cuts and large-scale infrastructure development as the cornerstone of his fiscal plans. Yet this fiscal stimulus could cause an accelerating US economy into overheat and force the Fed to adopt a tighter monetary policy stance.

Second, US-China relations remain clouded by Mr Trump’s rhetoric of China being a currency manipulator and unfair trade partner. Any unilateral trade sanctions imposed by the US on China will have knock-on effects in Asia, given the interconnectedness in the region. Furthermore, it will darken the already dimming mood for globalisation and free trade – which Asia is so dependent on.

Third, North Korea is the most pertinent geopolitical risk that could derail the rosy economic outlook. The recent death of Mr Kim Jong Nam, brother of North Korean leader Kim Jong Un, at the Kuala Lumpur International Airport, ostensibly at the hands of North Korean agents, brought the spotlight onto an increasingly unstable regime in the Democratic People’s Republic of Korea (DPRK). Any implosion in the Korean peninsula will definitely lead to financial market turmoil and currency fluctuations in the region.

The bottomline: The world will likely be a better place in 2017 as the global economy re-awakens on the back of strength from G3 and China. Rising world trade stemming from increasing global demand will feed into economic upswings in export-oriented economies in East Asia and Asean. However, some risks loom large. In particular, political spillovers from the Trump Administration in the US could lead to economic detriments as will a regime implosion in the DPRK.

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Jason Tan is an economist at Centennial Asia Advisors, focusing on macroeconomic and geopolitical developments in developing Asia. He delves into social, political and economic issues facing Singapore on the side.

 

Featured image from Pixabay. 

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