SINGAPORE, Jan 4 — The trade dispute between the United States and China may be hogging international headlines, but economists here say they are more concerned about a slowdown of China’s economy in the months ahead, which could be a bigger drag on the city-state’s economic growth.
The expected slowdown is not just because of the US imposing tariffs on Chinese goods, but more a result of China’s ongoing campaign to reduce its debt.
Given that China is Singapore’s biggest export market, Barclays Bank regional economist Angela Hsieh said its slowdown is a “bigger concern than the trade war” for the city-state.
And the effect of that is already manifesting, with Singapore exports to China shrinking throughout this year, starting even before trade tensions erupted between the world’s two largest economies.
In his New Year message, Prime Minister Lee Hsien Loong said Singapore’s economy exceeded expectations to grow 3.3 per cent in 2018, which was close to the 3.6 per cent growth in 2017.
In the year ahead, it is expected to grow between 1.5 and 3.5 per cent, he said. But he warned of “major uncertainties in the global economy, with growing trade conflicts, nervous financial markets and signs of slowing growth”.
After months of issuing threats and imposing tariffs on specific goods, the trade dispute began in earnest in July last year when both the US and China exchanged US$34 billion (RM140.85 billion) in tariffs.
While both countries are currently on a 90-day truce — they have to strike a deal by March 1 — economists believe negotiations will be a long drawn out process.
“Even after these 90 days, I don’t expect the tension to dissipate,” said DBS Bank senior economist Irvin Seah.
While the impact of the trade dispute on Singapore was muted in 2018 due to frontloading, which refers to exporters increasing their production and shipment now to avoid the upcoming tariff increase, economists say Singapore may experience the full brunt of it next year. They have lowered their projections for the Republic’s gross domestic product (GDP) growth for 2019.
Besides the oft-talked about trade tensions, the hiking of interest rates by the US Federal Reserve will be another source of uncertainty.
While Singapore’s economy may not be directly affected by the hiking of interest rates per se, economists say there may be repercussions on global financial markets, given that capital will continue moving out of emerging markets if the US continues to tighten its monetary policy.
The same goes for Brexit. British Prime Minister Theresa May faces a divided parliament even as the March 29 deadline is approaching for the United Kingdom’s official divorce with the European Union.
But economists say its impact on Singapore’s economy will be minimal — “less than a blip” as described by Seah — as they agree that Brexit is more a bilateral issue between the UK and the EU.
Senior economist at United Overseas Bank, Alvin Liew, agreed, noting that exports to the UK make up “a very small fraction” of Singapore and Asean trade.
However, he warned that Brexit may cause some volatility in financial markets.
Asean to the rescue?
Given China’s economic slowdown and a possible escalation of trade tensions, Singapore’s GDP growth is likely to moderate next year, economists said.
In a December survey by the Monetary Authority of Singapore (MAS), private sector economists said they expect GDP in 2019 to come in at 2.6 per cent, which is “a drastic paring down” compared to last year’s economic growth, said Seah.
But Hsieh noted that there is a silver lining — companies are realising the importance of Asean, as “they now know that overly concentrating in one market is not going to work”.
Some are seeking to relocate their production facilities from China to Southeast Asia in a bid to avoid US tariffs, while others have started exploring the possibility of moving their supply chain from China to countries such as Vietnam and Indonesia.
Companies here are also starting to see more orders from the US, they added.
Given that there is a new normal in the global trade environment, diversification is important for companies in the long term, said Liew.
“The trade dispute may not be a one-off event. It might reach a resolution in 2019, but further down the road there could be another episode.”
Progress has also been made in regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership.
“It’s ironic because the impetus of it came from trade tensions, which made smaller economies in the rest of the world feel like they had to get their act together,” said OCBC Bank’s head of treasury research and strategy Selena Ling.
The importance of the region comes after years of efforts by the Singapore government to foster greater economic cooperation between Asean economies.
Whatever positive impact from trade diversion, though, would not be immediately obvious to Singapore.
Seah said the effects of trade diversion are still nascent, and that it would probably take about 12 months to see real benefits.
This is because companies need time to implement their relocation plans and build physical facilities.
However, some economists believe that investing in Asean would not fully offset the negative impact from China’s slowdown on Singapore’s economy, even though it may help cushion the blow.
After all, China is the second biggest economy in the world.
Ling also pointed out that there are “idiosyncratic risks” within some Asean countries as well, such as the relatively new government in Malaysia, as well as the presidential elections in Indonesia next year.
Hsieh added that if the US central bank decides to raise interest rates more than expected, the Indonesian rupiah will be affected and this may eventually hurt overall investor confidence in Asean.
Key economic factors:
China’s economic slowdown
- China’s economy has been steadily slowing down since 2010, when it last posted a double-digit GDP growth.
- It is expected to grow 6.2 per cent this year — down from the 6.5 per cent growth forecast for 2018 and the 6.9 per cent expansion in 2017.
- The slowdown is largely due to President Xi Jinping’s attempts to reduce the country’s debt.
- China’s debt in 2017 stands at 250.3 per cent of GDP, according to its central bank.
- US debt is 78 per cent of its GDP.
- Xi has called on both public and private companies to reduce their debt.
- Banks have had to restrict lending, which has weighed on housing sales and consumer spending.
- Singapore’s non-oil domestic exports (Nodx) to China turned negative in December 2017 and has more or less continued shrinking through 2018.
- China is not only Singapore’s biggest non-oil export market, it is also Asean’s biggest trading partner.
US-China trade war
- The impact of the dispute on Singapore’s economy this year is minimal.
- A report by the Ministry of Trade and Industry in November stated that the city-state’s indirect exposure to export flows between the US and China is 1.29 per cent of GDP.
- The impact in 2019 may be more pronounced, depending on the deal that can be hammered out between the two squabbling countries by March 1.
- Ling said it’s unlikely that trade relations will be able to go back to how it was before the tensions started. “The current status quo is a pause on fresh tariffs. For tariffs that are already in place, some may unwind. But it’s unlikely that it will fully unwind.”
- If the US decides to slap on the initially scheduled 25 per cent tariffs on US$200 billion worth of Chinese goods, Hsieh said Singapore’s GDP may drop to around 2 per cent.
- Economists say Singapore needs to pivot more to Asean.
- As a regional hub, the city-state can benefit from investors diversifying into Asean, but these gains will not manifest so soon.
- CPTPP will come into effect on Dec 30 this year.
- Seah said there is too much focus on China in previous years.
- Data from the Department of Statistics showed that the share of Singapore’s Nodx to China has increased from 1.1 per cent in 1990 to 18.2 per cent in 2017.
- The share of Nodx to Singapore’s top three Asean trading partners — Malaysia, Indonesia and Thailand — is comparable to China, but has shrunk from 20.3 per cent in 2003 to 17.5 per cent in 2017. — TODAY