The Asian Development Bank lowered China’s 2019 growth forecast from 6.4% to 6.3%. For 2018, growth projection was kept unchanged at 6.6%. It cited “slower demand growth and an unfavorable trade environment” as the reasons for the downgrade. On US-China trade conflict, ABD said it could “deflate consumer and investor confidence, severely disrupt supply chains, impede technology transfer and foreign investment, and hit export-oriented industries in the PRC. ”
ADB Chief Economist Mr. Yasuyuki Sawada said, “services and consumption will continue lifting the PRC’s economy for the rest of 2018 although slower growth is expected next year, as ongoing trade tensions with the United States (US) are expected to affect net exports.” He added that “supportive monetary and fiscal policy will help ease the short-run strains” But also urged that “continued reform progress is needed to sustain future growth.”
Looking at the details, net exports are expected to hold back GDP growth for the rest of 2018 and 2019 as ” trade tensions with the US continue to intensify, coupled with a dimmer outlook on global trade and investment activities.” ADB expected current account surplus of China to lower to 0.7% in 2018 and further down to 0.2% in 2019.
For developing Asia as a whole, growth in 2018 is expected meet 6.0% forecast. However, 2019 growth projection was also trimmed by -0.1% to 5.8%. The US-China trade measures implemented by September 24 are expected to lower China GDP by -0.5% and US GDP by -0.1%. And they would have a “negligible effect on the rest of developing Asia”. It also noted that “with the trade conflict escalation, the US trade deficit with the PRC would shrink, but the overall US trade deficit would not change much as US imports would be redirected to other countries while US exports to the PRC declined.”
Also, ADB warned that “prolonged trade conflict can damage confidence and deter investment. This indirect fallout will be large for many economies in the region and globally, especially if automobiles and other parts become embroiled in the trade conflict.”
ADB’s press release on China here.
The Asian Development Outlook 2018 update here.
FOMC preview: Rate hike for sure, focus on new projections
Fed is widely expected to lift federal funds rate by 25bps to 2.00-2.25% today, without a doubt. The voting will be a point to note to seen how impatient the doves were. But it’s more likely to be unanimous than not at this stage. Also, there are expectations of a slight change in the language. That is, “the stance of monetary policy remains accommodative” could be changed to “somewhat accommodative” or even dropped. But this won’t trigger much market reactions, changed or not.
The major focuses will be on the new economic projections. Firstly, 2021 figures will be released. Based on June’s projections, medium projected appropriate federal funds rate will be at 3.4% by the end of 2020. We’d be eager to know if Fed policy makers expect to stop there through 2021, or they would lean towards more tightening ahead. (Btw, at 3.4% which is above 2.9% projected longer run rate, that’s tightening. Now, it’s just accommodation removal, totally different stage.)
Secondly, while all the figures, inflation, growth, unemployment, policy path matter, we believe the key is on the 2.9% estimated longer run rate. From the communications of Fed officials, the general consensus is for Fed to raise interest rate to “neutral” and see how it goes from there. A raise in the estimated longer run rate will be tied to a perceived higher neutral rate. And that would be, Fed’s rate hike cycle would likely be prolonged further. To us, this is the single most important figure that moves markets.
Here are some suggested readings on FOMC: