Ten predictions for Asia’s 2018
The present, Voltaire wrote, is always pregnant with the future. That observation seems especially prescient going into 2018, as fertile a year for prophesizing as the global economy has seen in ages.
Predictions are a mug’s game, of course. Even so, I can’t help but serve up 10 possible scenarios that could make Asia’s 2017 look downright calm compared to the 12 months ahead.
Rodrigo Duterte kneecaps Philippine economy. The terrible optics of President Duterte’s war on drugs have been balanced out by strong growth, a product of predecessor Benigno Aquino’s six-year reform boom. The peso’s dubious status as Asia’s worst performing currency last year, though, suggests patience is wearing thin. Manila has seen more shooting than economic retooling in the years Duterte has been in office. Fears he might impose martial law aren’t helping.
Chinese consumers will own the year. With “Single’s Day” each November blowing away America’s “Black Friday” and household consumption reaching the $4.5 trillion-mark, China has outgrown the “world’s factory floor” label. It has a long way to go to wean the economy off excessive debt and investment. In the first three quarters of 2017, though, final consumption accounted for nearly 65% of gross domestic product. Mainlanders are fast upping their global share of spending on premium brands, travel and entertainment. Move aside, US shoppers.
Central banks will douse bitcoin boom. Excitement about the best-known virtual currency isn’t impressing officials in South Korea. On top of steps to clamp down on cryptocurrencies and digital tokens, regulators are requiring those who trade them to do so under their real names. Seoul is at the vanguard of Asia’s struggle to curb runaway speculation in a market few understand without walling itself off from a potential boom industry. Such moves in the year ahead could spell disaster for bitcoin bulls.
South Korea will shock the chaebol. Seoul’s bigger challenge is levelling the playing field in an economy that’s grown too oligarched for comfort. President Moon Jae-in fired a shot across the bow of family-owned conglomerates, or chaebol, with a recent corporate tax hike from 22% to 25%. Expect Moon to roll up his sleeves to implement his “trickle-up economics” plan to catalyze a start-up boom. Brace yourself for a serious shock to the system.
Modinomics will lose even more urgency. In theory, the narrow victory Narendra Modi’s Bharatiya Janata Party secured in Gujarat last month augurs well for accelerated reforms to regain public trust. More likely, it will sap the prime minister’s appetite for taking risks ahead of next year’s general election. With growth north of 6%, now is the time to tackle land, labour and tax challenges. Instead, investors will see Modi resting on his laurels in ways that may disappoint the markets.
US tax cuts will backfire. Normally, slashing corporate rates from 35% to 21% would seem a slam-dunk way to hasten growth. Yet the legislation’s limits on local tax deductions in growth-engine states such as California, Massachusetts, New Jersey and New York are a “recession waiting to happen” to economic commentators such as William Cohan. A resulting drop in housing values and rising interest rates will have American consumers closing their wallets.
Shinzo Abe’s Trump bromance will sour. Japanese Prime Minister Abe staked out a lonely place as US President Donald Trump’s best friend among world leaders. That bond will be tested early and often as trade tensions mount. With the Federal Reserve and Bank of Japan moving in different directions, the yen is almost sure to weaken in ways that warrant attention from Trump’s Twitter feed. Tokyo will also be collateral damage should the White House slap tariffs on China.
A fresh taper tantrum hits emerging markets. In 2013, the mere hint the Fed might scale back on bond purchases wreaked havoc from Mumbai to Buenos Aires. Jerome Powell, Trump’s nominee for Fed chair, is a wild card for 2018. Recent tax-policy changes might accelerate inflation, warranting more assertive rate hikes. The People’s Bank of China also is in tightening mode. As central banks tighten the screws, markets will be in for a rude awakening.
Indonesia’s economy will surprise. After a slow start, President Joko Widodo found his reformist mojo. S&P Global in 2017 rewarded moves to increase transparency, boost infrastructure spending and pass a tax amnesty plan to pull more cash back home with an investment-grade rating. Expect Widodo to step things up a notch to improve Jakarta’s poor record of tax compliance and attacking graft.
North Korea tensions will intensify. With the PyeongChang Winter Olympics hanging in the balance, investors are struggling to hedge the ultimate Black Swan risk: the US and North Korea coming to blows. While the odds don’t favour an all-out war, the Trump White House is itching to shoot down one of Kim Jong-un’s missiles to send a message. That would panic markets everywhere—and make 2018 one for the history books.
William Pesek, based in Tokyo, is a former columnist for Barron’s and Bloomberg and author of Japanization: What the World Can Learn from Japan’s Lost Decades.
His Twitter handle is @williampesek