The Taiwan Banker

2018 has been a year of global trade friction. Looking ahead to next year, the global economy will remain turbulent. At a press conference, the Central Bank of the Taiwan said that markets are still watching international economic and financial development closely, requiring carefully considered responses. The global economy continues to expand at a decreasing rate while the US Federal Reserve (Fed) to normalize its monetary policy. Analysts expect the Fed to raise rates three times next year. Meanwhile, as liquidity gradually tightens, we are seeing significant depreciation of currencies in emerging markets. Given tumultuous market conditions, a number of countries have in turn begun easing their respective monetary policies. As a result, the Central Bank of the Taiwan sees four major global economic risks on the horizon in 2019. Growth is slowing, oil is rising, and inflation is a concernCiting the Germany-based Ifo Institute's third-quarter global economic survey, the Central Bank noted some signs that the global economy is weakening. Thus, the outlook for the next six months is the most tepid since the second quarter of 2012, dragged down by weak trade momentum and economic growth. In addition, amidst the Sino-U.S. trade conflict, global export orders, international air freight traffic, container port throughput, and electronic component trade volume have all slowed. The August WTO World Trade Outlook Indicator (WTOI) also dropped to a low for the year, indicating a further weakening of global merchandise trade. International raw materials prices have risen, also deepening market expectations of inflation in major economies. The central bank also pointed out that since July, markets have worried about intensifying trade friction between the US and China, which is harmful for the global economy. Meanwhile, currency crises, including in Turkey and Argentina, may affect other emerging markets, influencing demand for crude oil, causing price instability and a possible decline.After August, however, Qatar’s plans for aid to Turkey, Iran’s lower petroleum exports, the attack on the Libyan National Oil Corporation, and a reduction in American crude production and stockpiles drove a rebound in prices, which hit a high for the year since then. Meanwhile, geopolitical risks remain. The US has resumed economic sanctions against Iran, and its main oil-producing regions are facing a shortage of pipelines, another uncertainty influencing oil prices. The strong dollar has caused many currencies to depreciate, also leading to an increase in energy prices. The central bank quoted IHS Markit data showing that the average global inflation rate in 3Q was 3.1%, higher than 2.7% in 2Q. Forecasts for global inflation also rose to 3% from 2.7% last year, rising to 3.1% next year, enough to cause some worry.Strong US performance; the Fed turns hawkishThe Fed announced a rate hike in September, and another one is expected in December. Three more are expected next year, showing a strong US recovery. If future data supports this outlook, the Fed may take further measures to withdraw from monetary easing. In this regard, the central bank said that the recent expansion of American manufacturing activity, coupled with the continued expansion of employment, supporting consumption momentum, and the continued effect of expansionary tax and fiscal policies, will support continued strength in the second half of the year, with an annual growth rate of 2.9%, compared to 2.2% last year. Next year, however, as the trade war drags on, growth will fall slightly to 2.7%.For Europe, its central bank has stated that it will not consider rate hikes until next summer. According to its observations, economic confidence in the Eurozone has continued to slide since the beginning of this year, most notably in industrial sentiment, reflecting caution about orders and production. It predicted that economic growth in the second half of the year will be lower than in the first half, and this year’s growth will fall from 2.4% last year to 2%, and continue to fall next year to 1.7%.The Japanese central bank said that it would maintain its loose policy to reach its 2% inflation target quickly, while considering the uncertainty that the tax increase on consumption in October 2019 may cause on the economy and prices. “Extremely low short- and long-term interest rates will persist for a long period of time.” The Bank of Japan said that the intensification of global trade disputes will affect external demand, and predicted that Japan’s growth rate in the second half of this year will be lower than the first half. Annual growth will fall from 1.7% last year to 1.1%, continuing down to 0.9% next year.Meanwhile, in China, the People’s Bank of China announced lower deposit reserve ratios on October to alleviate the impact of the trade war, the downside risk to economic growth, and a restriction of credit supply to the real economy. Lower reserve ratios will also ease pressure on market liquidity and encourage banks to invest in medium-grade corporate bonds. With regards to the situation in the US, the central bank said that the US economy has expanded, and the market expects the Fed to raise rates. As the dollar interest and exchange rates increase, and liquidity gradually tightens, emerging market economies with weak finances or high external debts are already facing depreciation pressure. The central bank said that although 3Q rates did not move, Taiwan has no stagflation problem, and its finances are sound, with almost no external debt, so even though the NTD exchange rate to the dollar has depreciated, the amount has been smaller than against other currencies. The nominal effective exchange rate (NEER) and real effective exchange rate (REER) are both heading up, so from this perspective, monetary policy is still somewhat tight. Remaining uncertainty may limit growthFor next year’s global outlook, the Taiwan Central Bank also warned about “four major risks.” First, the uncertainty about the trade war continues to rise. The central bank stated that although the US reached a revised free trade agreement with South Korea, and new agreements with Mexico and Canada, tariffs on China have been growing. China has also adopted countermeasures, and trade frictions have intensified. Moreover, the US is also renegotiating trade agreements with the EU and Japan, so trade policy is now highly uncertain. According to projections by the International Monetary Fund (IMF), if tariffs become more widespread, impacting investment confidence in advanced and emerging economies and causing corporate investment to fall, global GDP next year could fall 0.4% from the original estimate, and a cumulative 0.5% in the next year.Second, after the global financial crisis, with expansionary Fed monetary policy, the US interest rate remained low for a long time, indirectly encouraging emerging market economies to issue dollar-denominated bonds at low cost. According to Bank of International Settlements (BIS) data, the value of dollar-denominated bonds issued by emerging market economies rose sharply from $1.6 trillion at the end of 2009 4Q to $4.9 trillion at the end of 2018 1Q.However, the US revised interest rates upwards several times, leading to dollar appreciation, increasing bond servicing costs. Bond investors are sensitive to interest rates. When the dollar interest rate rises to the extent of causing bankruptcy, rapid stop-loss selling pressure will broaden the risks, causing deterioration in emerging markets’ situation.Thirdly, there risks exist in China's economy and financial system. The focus of China’s economic growth will shift from quantity to quality. Also, the expanding trade war is not good for manufacturing investment and export growth, increasing downside risks for economic growth. Furthermore, non-financial debt has grown sharply, and doubts about real estate prices and the government’s deleveraging policy have caused more frequent bond defaults – not to mention P2P lending platforms – all of which have impacted financial stability. China is the world’s second largest economy and a major commodity importer and exporter. A “hard landing” would reduce international commodity demand, harming raw materials exporters, thereby affecting the global economy. According to forecasts, China’s growth in the second half of this year will be lower than in the first half. Growth for the entire year will be 6.7%, lower than 6.9% last year, and will continue declining to 6.3% next year.The final risk is geopolitical. In May, President Trump announced the withdrawal of the US from the Iranian nuclear deal, and the resumption of economic sanctions, which may affect the supply of crude oil. On top of that, Brexit will occur in March 2019, but the UK and EU have not come to agreement on key issues such as the Northern Ireland border, and the EU vetoed the UK Brexit plan, resulting in a deadlock in negotiations.Taiwan's economy forecast to grow steadily at 2.48% in 2019 As for Taiwan, the central bank said that the global economy will continue to expand next year, boosting Taiwanese exports. Coupled with higher basic wages, private spending will continue to grow at a moderate pace, and the government will actively promote forward-looking infrastructure development, giving Taiwan hopes for moderate growth.However, Taiwan's economic growth next year could be hampered by a number of risks: global trade frictions, risks in China, the normalization of monetary policy in advanced economies, and geopolitical risks. With that in mind, the Central Bank forecasts Taiwan's 2019 GDP growth to reach 2.48%, lower than 2.73% in 2018. Increasing uncertainty in the trade policies of major countries and important pending trade agreements may affect corporate investment confidence and economic growth. Furthermore, the monetary policy divergence of major economies, the financial fragility of some emerging economies, and monetary policy trends in the main economies will also greatly affect financial stability. Financial markets are focusing on relevant international economic and financial trends, and the situation is still touch-and-go.