Asia week ahead: Trade threat? Not yet

We think the global trade war has displaced geopolitics as the main risk to Asia’s GDP growth coming into 2018. Evidence of any impact of a trade war on growth at least in the first quarter of the year has been scant, though the war was only triggered in early March when President Trump announced hefty tariffs on steel and aluminium.

China and Singapore’s GDP growth came in on the stronger side in the first quarter. We expect GDP releases from Korea and Taiwan next week to reinforce the message, with firmer exports growth leading us to forecast firmer GDP growth for both economies.

Korea’s export growth accelerated to 10.3% year-on-year in 1Q18 from 8.6% in the previous quarter. Add to this positive consumer and investor sentiment from reduced North Korea tensions, and we could have GDP growth re-accelerating above the Bank of Korea’s 3.0% forecast for the first half of this year. Our forecast is 3.2% growth in 1Q18.

However, in its latest quarterly Economic Outlook report the BoK scaled back its growth forecast for the first half from 3.2% to 3.0%, citing a still weak labour market, which has weighed on private consumption as well as the moderate growth of investment in the IT sector. We will wait for more evidence to this effect to reconsider our forecast of a 3Q18 BoK rate hike, while we also see upside risk to our forecast of USD/KRW ending the year at 1,000 (spot 1,059). These risks could be more pronounced in the event of a full-fledged trade war, not our baseline though.

In Taiwan, 10.6% YoY export growth in 1Q18 was little changed from the previous quarter, supporting our forecast of steady GDP growth in 1Q18 at the 3.3% pace of 4Q17, which was the fastest pace in almost three years.

Taiwan’s GDP growth averaged 2.2% in the six years through 2016. Last year’s growth spurt was the function of strong global demand rather than strong domestic demand. This lopsided state of the economy exposes it to potential trade weakness from restrictive policies elsewhere in the world. And there is nothing that domestic policy could do about it. We expect the Taiwan central bank (the Central Bank of China) to keep monetary policy on hold for an extended duration.

Singapore’s industrial production for March will indicate the direction of revision to 4.3% 1Q18 GDP growth as part of the advance estimate. In the face of disappointing exports in March the risk is tilted toward a downward GDP revision. The real non-oil domestic export growth slowed sharply to 4% YoY in 1Q18 from 14% in 4Q17. In contrast, real manufacturing GDP growth more than doubled to 10%, boosting total GDP growth to 4.3% from 3.6% over the same quarters.

A steady expansion path for the economy this year and upward pressure on core inflation resulting from an improving labour market were the driving forces behind the recent central bank (Monetary Authority of Singapore) policy change to a “modest and gradual” appreciation of the Singapore dollar nominal trade-weighted index. However, the decoupling of exports and manufacturing raises questions about where all that increased output is going, and whether the MAS was a bit too early to begin tightening.