Asia: After a Goldilocks Year, 2018 Could Be Time for the Bears

If 2017 was a year in which the global economy and its stock markets performed much better than expected in the face numerous threatening political issues, could 2018 be the opposite? For sure there is a Goldilocks feeling at present, in Asia as elsewhere.

For all his sound and fury Donald Trump has yet to do anything that would cause immediate and serious alarm in the outside world – yet. Despite taking the US out of the TransPacific Partnership trade agreement, he hasn’t yet acted on the North American Free Trade Act, and may not, being under intense pressure from US manufacturers to maintain at least the framework. Asian exporters that act through NAFTA are holding their breath.

The Chinese economy has weathered more fears of the impact of accumulated domestic debt. Xi Jinping has been anointed emperor but now looks more focused on delivering a domestic agenda than in further aggravating relations with China’s neighbors.

Thanks to Trump’s disinterest in the US’s allies in east Asia, contempt for trade deals and climate change, China can sit back and see its prestige and influence increase without needing to push too hard. A new, more dovish president in South Korea has also helped. In Southeast Asia, politics in Thailand and Malaysia remained largely frozen, with thoroughly reprehensible leaders in both, and with both unlikely to be replaced.

Thailand is mostly still mourning the late king and Malaysia’s fractured opposition continues to fail to capitalize on the evidence of massive plunder by Prime Minister Najib Razak and UMNO at large. In Myanmar Aung San Suu Kyi has proved a figurehead as the military pursued ethnic cleansing of the Rohingyas without hindrance, and ASEAN again proved incapable of influencing members in the direction of religious and racial tolerance.

Indonesia’s President Joko Widodo was bruised but unbowed by the victory of Islamists in the Jakarta guberenatorial election and in India Prime Minister Modi was bruised by elections in his home state of Gujarat but appears to have considerable staying power. So too may Rodrigo Duterte in spite or because of continued extrajudicial killings, now aimed at Communists as well as drug dealers. On the brighter side, the economy continued to grow steadily and significant, if still inadequate, tax reform was enacted.

Japan’s Shinzo Abe strengthened his position via elections but conservatives lost badly in South Korea after the impeachment of president Park Geun-hye with liberal Moon Jae-in winning easily with 41 percent of the vote against two candidates.

Globally commodity prices, including oil, have moved up enough to ease concerns of most producing countries yet not enough, it seems, to generate inflation scares. Likewise gradual interest rate rises, actual or promised, have been absorbed. In Asia growth has been steady if unspectacular,m and globally problem countries Brazil and Turkey have bounced back. Europe has so far mostly rejected populism and the euro is again a favored currency. Britain’s Brexit is suicidal but in slow motion and largely irrelevant outside the eurozone.

Without being unduly pessimistic, it seems that 2018 has the potential for upsetting this relatively benign outlook for Asia. First is the question whether Trump will actually wage an economic war against China. Alleged failure of Beijing to bring North Korea to heel will always be the excuse, irrelevant though it should be to trade issues. It may be Trump’s only alternative as even he realizes that there is no way of ending Pyongyang’s nuclear capability short of a potentially nuclear war which even his most gung-ho generals do not relish.

Any serious measures against Chinese exports to the United States would result in retaliation against the US, put downward pressure on world trade, which has been growing at a healthy 4 percent, and possibly induce copycat moves by other countries.

Any such economic conflict would damage all of east Asia, even assuming – which is a big if – that the US makes it clear that it will not take similar measures against the many other Asian countries which enjoys large trade surpluses with the US. Even if this does not transpire, stock markets in the region may already be quite fully valued after rises of 15-30 percent in the past year.

Also on the economic front, the notion that the world can have years of almost zero interest rates and huge credit expansion without a payback time could well be tested in 2018. The reality of promised interest rates rises and ending of bond purchases by central banks has yet to hit, and no harder than in the US, where last week it was reported that a stunning 35 percent of Americans have been reported to debt collection agencies trying to collect an average of US$5,200 per person. If interest rates were to rise, consumer debt could mean disaster.

Sinisterly, the yield curve has started to reverse, a chillingly reliable harbinger of recession.

However, interest rates may be brought forward by the Fed if cracks appear in the assumption that inflation is dead and buried. Take China, whose role in global trade is readily transmitted to the world. Its official consumer price index is still rising at just under 2 percent. But the GDP deflator, which measures much more, is now more than twice that. Producer price inflation is over 5 percent and even if some of this reflects short term movements, it can’t be long before there is a reflection in consumer prices, even if delayed by price controls in an energy market due to be deregulated.

Chinese export margins may be squeezed but with the yuan strong against the US dollar, moving from 6.90 to 6.50 over the past 12 months, Chinese price pressure will be transmitted elsewhere.

Trump’s neglect of Asian issues apart from North Korea and China trade will continue to undermine the US position in the region, and may get worse if Secretary of State Tillerson is replaced by someone who reflects Trump’s unsettling proclivity at unorthodoxy. However, the notion of Indo-Pacific as a strategic concept may continue to find quiet support now that Japan, India and Australia have become informally committed to it. Other countries in the region may see the merits in arrangements which at least in part compensate for the decline of US influence and interest.

Xi Jinping will probably be mainly concerned with domestic issues – further shoring up the power of the Communist Party and focusing on financial stability, income distribution problems and the environment. Indeed, it will be a test of the Xi’s concepts and of the role of the party, if it can produce the results which could be used to justify the more oppressive nature of the system he has imposed.

Less secure is Thai junta leader Prayuth Chan-ocha, who is no longer shielded by the mourning period and is due to deliver some elections, however distorted by the new constitution. He has also been prone to gaffes. The political situation looks to become more fluid, meanwhile the king remains largely hidden from public view, often in his German redoubt, but will continue to create waves of his own. Najib on the other hand look likely to survive Malaysia’s elections thanks to opposition weakness, despite Mahathir’s attempts to galvanize Malays, and a system massively weighted towards conservative rural constituencies.

Indonesia has till April 2019 to wait for its presidential election but the campaign will begin in earnest in October 2018 with Widodo hoping that the current pickup in the economy, unspectacular though it is, will have enough momentum to keep him ahead.

Hong Kong will continue to find that its new chief executive Carrie Lam is even more determined than her predecessors to do what she is told by Beijing. But pro-democracy groups will face tests of their popularity in by-elections to replace legislators elected in 2016 but disbarred during 2017.