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World economy faces strong headwinds from uncertainty, instability

While 2016 could be described as a year of global economic shocks — think Brexit and Mr Donald Trump’s stunning victory in the United States Presidential Election, among other events — the coming year could be one where the ramifications are well and truly felt.

Economists are concerned that Brexit could give rise to obstacles to businesses, and become a drag on an already lacklustre global economy. AP file photo.

Economists are concerned that Brexit could give rise to obstacles to businesses, and become a drag on an already lacklustre global economy. AP file photo.

While 2016 could be described as a year of global economic shocks — think Brexit and Mr Donald Trump’s stunning victory in the United States Presidential Election, among other events — the coming year could be one where the ramifications are well and truly felt.

Mr Trump will be sworn in as the 45th US President later this month, while United Kingdom leaders have set a March deadline to get their country out of the European Union. With elections in several European countries taking place in the coming months, the rising tide of anti-globalisation in the West could be further entrenched, apart from greater political instability on the continent.

To compound the global economic uncertainty, the US Federal Reserve has plans to quicken the pace of interest rate hikes. In all, a heady concoction for the global economy to stomach. “The headwinds to a broad-based sustainable recovery remain (in 2017) — economics, politics, among others,” said CIMB Private Banking economist Song Seng Wun.

IMPACT OF TRUMP ADMINISTRATION

Mr Trump’s win could usher in a stronger US economy — investors certainly think so, with the greenback hitting multi-year highs last year following the results of the November election.

The Republican is expected to increase spending on infrastructure, slash taxes, and cut red tape for businesses. While a more healthy American economy had previously meant good news for the rest of the world, there are fears that the new US administration will pursue the isolationist policies that Mr Trump had campaigned for.

ANZ economist Ng Weiwen noted that while Mr Trump has yet to provide details on his plans, he is expected to “unleash a sizeable fiscal stimulus” and heavily scrutinise trade deals.

“The rhetoric from key Republicans is that they are against unfettered spending or tax cuts. This is hardly surprising from a party that has consistently been resisting an increase in the federal debt ceiling,” said Mr Ng.

In a video posted on YouTube about a fortnight after his election victory, Mr Trump announced that he will withdraw his country from the Trans-Pacific Partnership (TPP) on his first day in the White House.

“Instead, we will negotiate fair bilateral trade deals that bring jobs and industry back onto American shores,” he had said. He added that his agenda will be based on “a simple core principle: Putting America first”.

Last month, the Fed unexpectedly announced that it plans to raise interest rates three times this year — up from two last year — followed by another three hikes next year.

Mr Ng believes there could be more hikes in store if the US adopts a more expansionary fiscal policy. UOB economist Francis Tan said: “We expect US bond yields to continue rising and the Fed to be at its most hawkish state since the last normalisation of rates back in 2004.”

BREXIT, POLITICAL INSTABILITY IN EUROPE

Meanwhile, in Europe as well, anti-globalisation and populist sentiment are on the rise.

Last month, Prime Minister Lee Hsien Loong raised a concern during the People’s Action Party conference about the continent’s election season this year, given that the mood of voters fed up with mainstream political parties and voting for change is growing in many developed countries.

The Netherlands will be going to the polls in March, France in May and Germany in September. Italy was recently plunged into political and economic uncertainty, after Mr Matteo Renzi fell victim to a global wave of anti-establishment anger, and resigned as Prime Minister following his defeat in a referendum on constitutional changes.

Pointing out that global trade flows could be stymied, Mr Ng said: “Political-event risks will remain high with a number of elections in key European economies. Post-Brexit and ahead of European elections next year, free trade has scarce political support.”

The economists reiterated concerns over a protectionist tide that could give rise to obstacles to businesses, and become a drag on an already lacklustre global economy. “If you throw up extra barriers to economic activity, you are throwing up extra layers of activities and paperwork, which involve extra costs. Higher costs in an environment where growth is slow will be a hindrance to overall economic growth,” said Mr Song.

Mr Tan expects a more volatile year ahead, given the impending developments in Europe and the United States. “Brexit alone will not impact trade or investments that much, but if it sets the trend for trade protectionism, then it will be harmful for the rest of the world, particularly developing economies that urgently need to get out of the poverty or middle-income trap by increasing trade,” he said.

CHINA’S SLOWING ECONOMY

Earlier this week, a government-run think-tank in China said the Asian giant’s economic growth could slow to 6.5 per cent this year, from about 6.7 per cent last year.

Economists pointed out that the coming year will be important for China, with policies expected to be rolled out to boost its economic prospects, which have a huge bearing on the rest of Asia.

“There will be step-ups in economic reforms … The recently concluded Central Economic Work Conference in Beijing gave us some hints of are what to come: Supply-side reform, proactive fiscal and monetary policies, stable RMB, cutting excess industrial capacity, destocking, lowering corporate costs, curbing asset bubbles,” said Mr Tan. In time to come, stable Chinese growth and a more reflationary fiscal policy in the US should be positive for Asia’s growth, said Mr Ng. Meanwhile, however, Asia would have to withstand a capital flight.

“At present, prospects of a more protectionist trade policy and the capital outflow impact from a stronger USD and higher US yields are dominating sentiment,” Mr Ng noted. Capital outflows have been a growing concern for the Chinese government over the past year as it attempted to put the economy back on track and keep the currency stable without exhausting its reserves, which tumbled to US$3.05 trillion (S$4.4 trillion) in November last year, the lowest in almost six years.

ASEAN GROWTH STORY

Given the global economic uncertainty, comfort could be found closer to home.

With the Philippines taking over the chair of the Association of South-east Asian Nations (Asean) this year, economists said this may translate to more economic link-ups between China and the region.

Pointing out that countries in Asean recognise the benefits of trade and globalisation for their peoples, Mr Song said: “Next year is Asean’s 50th anniversary and interestingly it will be chaired by the Philippines, and their very outspoken strongman of a President who is now more friendly to China than any other previous Philippine president or Asean chairman. So that in itself will also create all kinds of opportunities.”

HSBC economist Joseph Incalcaterra noted that the demise of the TPP was a blow for Asean, but he said that there is “some hope that President Duterte will make a strong push for further integration” within the grouping.

“After all, it is in the interests of the Philippines to promote services liberalisation given its sizeable surplus labour force, much of which are trained in professions such as nursing, which is in high demand in other Asean economies,” said Mr Incalcaterra.

The Asean Economic Community was established in late-2015. While economists noted that implementation of the initiatives is slow, the group is moving ahead with linkages with external partners.

Mr Incalcaterra said: “With TPP unlikely to see the light of day anytime soon, Regional Comprehensive Economic Partnership (RCEP) is the hot topic in Asian trade. Despite talk of it being ‘China-led’, it is actually an initiative born from Asean’s current free trade agreements.”

He added: “With increased protectionism in the West, deals such as RCEP provide one source of trade stimulus. However, seeing that Asean is ultimately negotiating RCEP as a single entity, increased integration at home is imperative to ensure that RCEP works to the region’s benefit, by strengthening and not dividing the regional supply chain.”

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