At the start of 2020, the Asian economy looked set for a rebound as some of 2019's headwinds eased, trade relationships improved, Southeast Asian manufacturing grew, and incomes rose according to Deloitte's latest Voice of Asia report.
Our new Chief Economist Zoe Wallis explains the importance of these trends for the New Zealand economy...
Growth in China slowed to a still solid pace of 6.1% year-on-year in 2019. While this is the lowest pace of Chinese growth seen in 30 years, it is a sign of China’s efforts to switch to a more sustainable, consumption-driven economy. The increasing evidence of economic stabilisation in China should have a positive impact on the New Zealand economy given our high levels of engagement with China as a major trading partner.
The US-China trade deal signed in January marks a de-escalation of the trade tensions that characterised much of 2019. Should this important relationship continue to stabilise, we will see a corresponding rebound in trade confidence globally which will have a flow on effect in the NZ economy. The phase-one deal has avoided additional tariffs on Chinese goods entering the US.
However, the recent outbreak of Novel Coronavirus in the Wuhan province of China is expected to dent economic growth in the short term. The epidemic harks back to the SARS outbreak experienced in 2003. For New Zealand, the flow-on effect is expected to see reduced tourist numbers from China and other regions with high infection rates. The volume of New Zealand exports to China is also predicted to decline as fewer people eat out - hitting seafood, beef and lamb exports to China. The overall impact on New Zealand (and the global economy) will depend on the duration of the outbreak and how quickly confidence recovers after the immediate threat has passed.
Economic growth rebounded relatively strongly in the wake of the 2003 SARS outbreak and current expectations suggest this should occur again once the coronavirus starts to be contained and the imminent threat has passed.
Manufacturing shifts in the region will also prove significant in 2020 and we will likely see an increase in the number of companies choosing Southeast Asia as a base rather than China. This is a good news story thanks to a lower cost of production in Southeast Asia, as China switches its focus to producing products and services higher up the value chain.
The trend toward higher incomes in Asia (and particularly China) continues, with increased consumer spending power bringing further opportunities for New Zealand exporters. This will apply particularly to high-end produce, thanks to the maturation of e-commerce and supply chains in the region.
The Deloitte 2020 Voice of Asia report notes that as we look towards 2020, there are some strong drivers of growth that may produce a reasonably upbeat outcome for Asian economies in the year ahead, albeit with near-term risks from Novel Coronavirus.
Market-by-market 2020 outlook
Australia's economic slowdown has been caused by home-grown factors including worsening drought conditions and house price declines. Although tax and interest rates have been cut, there may not be a meaningful pickup in the Australian economy until 2021.
The Chinese Mainland is regaining its balance despite a long-term, secular growth downtrend, and Hong Kong, despite well-publicized difficulties over the past several months, remains a world leading financial centre, with its currency peg to the US dollar holding firm, and could benefit from government stimulus.
India's economy has been suffering from the effects of the Non-Bank Financial Companies (NBFC) crisis after problems in its formal banking sector. Corporations are still highly leveraged. It should bottom out in 2019 but remain subdued despite government stimulus and amid considerable downside risks.
Indonesia looks set to maintain steady growth of about 5 percent in 2020, with a young workforce, increasing urbanisation and monetary policy support for demand. The economy is becoming more stable but has yet to fully take advantage of the diversion of production out of China.
Exports have contracted and business confidence is subdued, and natural disasters have further depressed economic activity, but GDP growth has been quite resilient. Economic growth is expected to sustain at about 0.5 percent over the next two years.
Strong domestic demand led by household spending underpin Malaysia's economic resilience, and its exports have outperformed. Its competitive currency, growth in manufacturing activity and a resumption in infrastructure projects are expected to support continued economic growth.
The economy slowed in early 2019, largely due to global headwinds. It is expected to return to trend levels of about 2.5 percent growth on average in the next couple of years, supported by factors including a tight job market, still-strong population growth and decent export prices and volumes.
The Philippine economy bottomed out in mid-2019 and is set to be boosted by a revival in the electronics sector, strengthening exports thanks to an expected pick up in the Chinese economy, continued strength in remittances and policy support that should drive consumption.
Singapore is also expected to enter a recovery in 2020, supported by improving global growth and stronger electronics and precision engineering demand. There are also green shoots in finance, insurance, essential services and the "new economy". The outlook for investment growth is also positive.
We are upbeat about prospects for the South Korean economy in 2020, with an expect increase in demand for its manufactured goods. Government measures including a record budget of KRW 513.5 trillion (USD 4.36 billion) for the year should protect against downside risks.
Taiwan's economy was resilient in 2019 despite being caught in the crossfire of the US-China trade war and the step-down in the global electronics cycle. We expect the economy to outperform in 2020 on rising private investment, government policy to attract high-end manufacturing and other factors.
After a slow start, Thailand's economy is expected to pick up in 2020, with export growth likely to have bottomed out, increasing tourist arrivals, rising farm incomes, positive fiscal policy and a recovery in private investment.
Vietnam is expected to remain one of Southeast Asia's outperformers in 2020. It is one of the main beneficiaries of the relocation of production from China, which is prompting a surge in foreign investment. Its main challenges are manpower constraints, supply chain frictions and an infrastructure gap.