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Trade war

ADB trims Asia's 2019 growth forecast over US-China trade war

Additional pressure on currencies risks further capital outflow, says report

MANILA -- Asia's growth next year will be hit by a further escalation of trade tensions between the U.S. and China, the Asian Development Bank said in a report released Wednesday. The bank also stated that a potential U.S. rate hike and exchange rate volatility could accelerate capital outflow from Asian countries.

In its Asian Development Outlook report, the ADB maintained developing Asia's growth forecast at 6% this year, but trimmed the projection for 2019 to 5.8% from 5.9% in July amid the growing trade dispute between the world's two largest economies and tighter global liquidity. Developing economies in Asia make up 45 of the ADB's 67 members, which include countries in Europe and North America.

The bank said protectionist measures would lower China's gross domestic product by 0.5 percentage point, but will not affect the rest of the region for now. "However, any further escalation, such as 25% tariffs on all bilateral trade between the U.S. and PRC [People's Republic of China], would have greater consequences," the report said.

The U.S. on Monday imposed 10% tariffs on $200 billion worth of Chinese products and will raise those rates to 25% in January 2019. Washington has also threatened to target an additional $267 billion worth of goods. China has retaliated with a similar rate on $60 billion worth of U.S. goods, which it will raise to 25% by the end of the year.

The U.S. previously imposed 25% tariffs covering $50 billion worth of imports from China, prompting similar countermeasures.

China could lose one percentage point in terms of GDP, while the U.S. would shed 0.2 percentage point. Other economies in Asia would also "feel the pinch" when production slows across global supply chains. The estimate does not account for disruptions in production units and cancellations in investment plans amid a reallocation of global production.

"Such disruptions could be substantial as the conflict drags on, escalates, or spills over into financial markets," the ADB said.

China's growth projection for this year has been kept at 6.6%, but next year's outlook has been reduced by 0.1 percentage point to 6.3% amid slower demand growth and the fractious relationship with the U.S. "Supply-side reform amid monetary and fiscal support will nevertheless ensure that growth remains on track," the ADB said.

In addition to the trade war, signs of the U.S. economy overheating could prompt the Federal Reserve to raise interest rates at a faster-than-expected pace, which would intensify capital outflows from the region and put additional pressure on Asian currencies.

Countries with elevated private debt like Malaysia, China, South Korea and Thailand could experience destabilizing effects on their financial sectors.

Joseph Zveglich, ADB assistant chief economist, said on Wednesday that these countries could better manage liquidity pressures through so-called macroprudential measures and moving their policy rates in step with the Fed.

Several currencies in Asia, such as the Philippine peso and the Indonesian rupiah have depreciated against the dollar, generating higher domestic inflation. In response, Asian central banks have tightened monetary policy and raised interest rates.

"Such action could dampen growth in their economies," the ADB said.

Exchange rate volatility outside the region has also had an effect. In the second quarter, the Argentine peso and Turkish lira came under heavy pressure, causing sell-off anxiety and temporarily spilling into Asian currencies like the Indian rupee and Indonesian rupiah.

"While regional economies have responded to external shocks so far with resilience, policymakers must remain vigilant," the ADB said.

India, South Asia's largest economy, is on track to grow at 7.3% and 7.6% this year and next, respectively, as it recovers from temporary shocks resulting from the demonetization of large bank notes and the introduction of a national goods and services tax in 2017. However, external headwinds could dent the country's growth prospects, the bank said.

In the medium term, the redirection of trade as a result of the trade war could benefit Southeast Asia, as well as economies such as Hong Kong, Taiwan, South Korea.

The growth projection for Southeast Asia this year has been cut to 5.1% from 5.2%, as six out of 10 economies in the region will grow at a slower pace than initially expected. Malaysia's transition to a new government has weakened investment growth, while net export growth in Indonesia, the Philippines, Thailand and Vietnam has moderated.

Next year, the region is expected to grow at 5.2%, unchanged from the ADB's previous forecast. Exports and infrastructure investments will drive Southeast Asia's growth, the regional lender said.

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