APAC Economic Snapshots: The Cyclical Tide is Receding

Growth continues to ebb and flow across Asia-Pacific but the cyclical tide is receding. We have long expected growth to slow for the region and it is the pace of the slowdown that is the key uncertainty. For now the data and economic policies, which at a global level are still broadly supportive, suggest a gradual and benign slowdown. Still, some forward thinking indicators, especially confidence and export orders, do suggest a risk of a more pronounced slowdown in the months ahead.

In large part, the regional slowdown reflects the influence of global factors, especially growth in China and U.S. dollar liquidity. The slowdown in China, driven by past policy tightening, is broadening out across the economy, including real estate, and starting to spill over across the region. together with moderating external demand from other parts of the world, this is contributing to what now looks like a peak in Asia's trade cycle (see Chart 1). The risk is that global trade tensions amplify what looks to be the start of a downswing in the trade cycle.

Tighter U.S. dollar liquidity cycle is also slowing growth. The effects vary across countries, as we show below, but by raising the cost of external borrowing and, in some cases, causing central banks to hike policy rates, this will tend to dampen demand. More recently, the dollar and U.S. Treasury yields have stabilized, which has eased pressures on some emerging markets in Asia. However, external financing remains much tighter now compared with the start of the year. This is underscored by two data points -- the yield to maturity on non-investment-grade dollar bonds from Asia issuers has risen by over 300 basis points since the end of 2017 while issuance has more than halved.

The property cycle may be another drag on growth in some key economies. Following a prolonged expansion, macroprudential measures have been tightened to either limit financial stability risks or more directly cool what had become hot housing markets. This may now be having an effect including in Australia, China, Hong Kong, and Singapore. Weaker housing demand and falling home prices could slow residential investment growth and, through a wealth effect, dampen household consumption.

As trade, liquidity, and property cycles turn, downside risks still appear more pronounced.  An escalation in global trade tension remains the largest threat to growth. While the measures announced so far, including the prospective rise in U.S. tariffs on China in January, have small direct effects, another ratcheting up of tension could further erode confidence and weaken business investment in 2019. Lack of policy traction in China and the risk of sharper-than-expected slowdown has become more prominent over the last month. Finally, we continue to focus on the possibility of a further abrupt tightening in U.S. dollar liquidity conditions.