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Opinion

Asian exporters must heed Singapore's recession warning signs

Southeast Asian nations will fall victim to same global troubles

The specter of recession hangs grimly over the world economy. Bond markets this week signaled a looming contraction in the U.S. Global manufacturing is already shrinking. In Asia, Singapore's move to slash its growth outlook on August 13 underlined the fact that Asia's trade-dependent economies now face their bleakest moment since the global financial crisis -- one where their governments are set to struggle to respond.

Singapore's economy flatlined in the most recent quarter, prompting it to cut forecast growth to between zero and 1% this year, down from between 1.5% and 2.5% earlier. In July, Prime Minister-in-waiting Heng Swee Keat said his country was not yet expecting a "full-year recession."

But that was before a string of further negative global data, more recently showing Germany's economy shrinking and Chinese industrial output slowing to its lowest level in nearly two decades.

Bad news in trade-dependent Singapore often hits other Asian exporters soon after, hence why the city-state is viewed as an early-warning beacon. This suggests a sharply worsening outlook elsewhere across the region, compounded by three interlinked problems.

First and most obviously, the trade war between the U.S. and China shows few signs of abating. After the collapse of the most recent round of talks a meaningful deal before America's presidential elections in 2020 looks unlikely.

On August 13, President Donald Trump did temporarily delay imposing a portion of his latest threatened round of tariff hikes on Chinese imports, briefly buoying markets. But the larger effect of his erratic back-and-forth negotiating strategy is merely to deepen the uncertainty that has hit business confidence and led manufacturers to cut orders and delay investments.

Morgan Stanley economist Chetan Ayah suggested earlier in August that any further trade war escalation would prompt a global "recession" in the first half of 2020, which the investment bank defines as growth falling below 2.5%, from its current level of around 3%.

Even if this is avoided, its prospect should finally put to rest the notion that an ongoing period of trade conflict will create winners as well as losers, especially in Asia.

Secondly, while much blame for this deteriorating global outlook rests with President Trump, deeper structural factors are also at play. China's gross domestic product is slowing in particular, hitting its lowest level in nearly three decades in July. Most analysts expect growth to continue to fall next year.

Other major regional economies look sluggish too, not least India. But the warning from Singapore's outlook cut will be felt most acutely in trade-reliant nations like Malaysia, Thailand and South Korea, all of which look likely to be hit as Chinese imports continue to dry up in sectors like electronics and industrial goods.

All of this is then compounded by a third problem, namely rising geopolitical risks. From the possibility of Chinese military intervention in Hong Kong to potential conflict between India and Pakistan over Kashmir and the ongoing trade dispute between Japan and South Korea, Asia is brimming with flash points that could potentially spook investors.

Police fire tear gas at protesters in Hong Kong on Aug. 14: Asia is brimming with flash points that could spook investors.   © Reuters

These factors do not necessarily mean economies around Asia will head into recession territory themselves, however lower growth is all but certain. Take Thailand. The Asian Development Bank had already cut its outlook for Southeast Asia's second largest economy to 3.5% back in July. Facing much the same mixture of slumping manufacturing output and exports as in Singapore, even that looks optimistic.

The larger issue is that regional governments are constrained in their ability to respond. Thailand's central bank cut interest rates more sharply than investors expected earlier in August, as did its counterparts in India and New Zealand. More cuts are all but certain elsewhere around Asia in the coming months.

Conventional monetary policy can only do so much to guard against a sustained global downturn, however, potentially leading to calls consider more unconventional monetary stimulus measures. New Zealand's traditionally conservative central bank floated the idea that it might consider negative interest rates or bond-buying programs earlier in August.

Fiscal stimulus is likely to be needed too, a step Singapore's government says it is ready to take, as it did on the last occasion its economy slid into recession territory in 2009. But the real problem is that there will be hardly any help from outside. The U.S. Fed has little room for further rate cuts, while the European Central Bank has virtually none.

This brings attention back to China. Asia's manufacturing economies last came under pressure in 2015, against a backdrop of slowing Chinese growth and declining global commodity prices. On that occasion Beijing rode to the rescue, launching fresh rounds of infrastructure spending and boosting credit growth.

This time China's growth is lower and its room to maneuver more constrained, as it tries to reduce domestic debt levels. Although symbolically significant, China's decision to allow the yuan to sink below seven against the dollar will provide only modest help to its own exporters. Its central bank has sounded cautious on rate cuts too.

As the global economic clouds darken, exporters elsewhere in Asia will have to cope with the effects of this latest manufacturing slump on their own. They should prepare for the worst.

James Crabtree is an associate professor in practice at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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