[Premium] Chairman’s Note (01/2017) – Trump’s USA and the Global Outlook

February 2017 |
A number of members have asked me to share perspectives on the 2017 outlook. In an early October 2016 interview, I said we should be preparing for a Trump presidency. But crystal ball gazing is always challenging and has been especially difficult in this period.

Signs in the global economy are mixed and while growth in the USA are welcome, this can cause ripples for other countries as markets and currencies adjust. There are volatile politics in Europe, the Middle East and sizeable economies (e.g. Turkey) that can potentially worsen to impact global growth. US President Trump is new in office and many questions of personality and also policy remain. I feel this presents the most challenging time since the 2008 global financial and 1997 Asian crisis. Yet the precise nature of problems remains unclear. Against this background, may I offer the following observations:

1. Global and American Pick Up: After a poor 12-18 months, growth seems to be picking up, led by the USA. American demand for imports rose 1.5 per cent to $235.0 billion in December 2016, the highest level since March 2015. Other trade indicators are growing – such as export order and the demand for container and airfreight. This suggests a more robust demand for Asian exports in 2017, compared to the falls in both volume and value last year. The JPMorgan Global Purchasing Manager Index (PMI), compiled by Markit, increased for a fifth consecutive month in January to a 22-month high of 53.9. The OECD’s lead indicators show the big three economies of the USA, European Union (EU) and Japan have bottomed out and are returning to their trend rates. For the USA, with fiscal stimulus expected, modest growth can strengthen into 2018. The economy is more promising than it was in the last 18 months.

2. Resilience and Corrections: The regional economies are not without problems but are expected to continue to out perform the world. Resilience to external shocks is improved, and most have stable macro-economic management and sufficient foreign currency reserves. This will be tested as US growth leads to changes in the Fed rate – expected earlier but postponed, pending more policy clarity. As US financial markets tighten, an exodus of capital from emerging markets, which could trigger currency volatility, could take place. There will be corrections across emerging markets after a long period of extremely low interest rates and easy money. Asian firms that took on too much and mismatched U.S. dollar-denominated debt may struggle with repayment. If required, ASEAN countries can resort to the regional Chiang Mai Initiative Multilateralization (CMIM) agreement which provides “insurance” against volatile capital flows at the macro-level.

3. Political Shocks: The bigger risk comes from global political shocks. One potential source is the new Trump administration. It remains uncertain how he will govern. We consider three scenarios. (1) Trump as Pence: Trump moderates to move towards the Pence side of the Republican party – still a major change from the previous administration and centrist Republicans, but this would be relatively known, and party-influenced; (2) Twitter Trump: Trump continues to be impulsive and inconsistent, leading to turbulence and incoherence in US policy. (3) Trump as Dealmaker: Trump by-passes international rules and flexes American leverage to extract special concessions for American benefit. Observe the Abe visit to Trump. Based on early reports, there is an effort to correct earlier unorthodoxies (i.e. reaffirming the US-Japan security alliance and also acknowledging the one-China policy with Beijing) as well as playing deal maker. Uncertainty about US administration personnel and priorities will persist at least for the first half of 2017.

4. Asia Alone – Again: If the US reduces engagement, is difficult and/ or unreliable, Asians will look to or reconsider “Asia alone” arrangements. When Trump withdrew from the Trans Pacific Partnership (TPP), attention has turned the Regional Comprehensive Economic Partnership (RCEP) – even if this is not a replacement and economic gains will be less for advanced economies. ASEAN is supposed to play a central role in RCEP and other Asian fora but may struggle to move forward.

5. China’s Regional Role: As its domestic economy slows, China’s regional role will grow, especially given uncertainty about the Trump administration. Bilateral engagement with selected ASEAN countries will grow for investment and infrastructure. Competition with Japan for commerce and infrastructure projects is evident, and can be positive for ASEAN countries. But Sino-Japanese political rivalry can increase and turn negative, unless managed.

6. Singapore: Relations with the USA and China are in flux and bear attention. This is not only on political issues but for economic growth, with new value chains and disruptions to traditional sectors. Nearer to home, ASEAN makes more sense than ever, both as a way to mediate with major powers and to tap into the dynamics of our neighbouring economies. Special attention should be given to Indonesia, following the Singapore-Indonesia leaders retreat end 2016. Expect Singapore to try to deepen links with regional partners and diversify further abroad.

Looking forward, this will be a year with many challenges but also some bright spots. The SIIA and I will continue to share views with our supporters and corporate members. We would be glad to hear from when you might have time to come to our events or when we next meet. Given the complexity and uncertainty of events, different perspectives will be valuable.

Yours sincerely

Simon Tay
Chairman