ECONOMY

A TWO-SPEED ECONOMY

Asia Pacific GDP growth weakened to 4.3% in 2019 due to the slowing global economy and U.S-China trade conflict. Although global business confidence in the service sector improved in December following the announcement of the “Phase-One” trade deal, manufacturing and trading companies remain cautious amid marginal growth in new orders in the short term. However, they will undoubtedly benefit from lower tariffs.

CBRE expects Asia Pacific GDP growth to stand at 4.2% this year and the region to remain as a two-speed economy. Emerging markets will continue to grow at a faster pace but challenges will persist. In January, China implemented a further 50bps cut to its Reserve Requirement Ratio (RRR) and is expected to adopt further stimulus measures over the course of 2020, helping to stabilise economic growth at around 6%. However, corporate debt in the real estate sector will remain high. Non-performing loans also remain a concern in India, but recent fiscal expansion is expected to shore up domestic demand.

Growth in mature markets will remain slow. Singapore is set to recover from recent weakness but sociopolitical unrest in Hong Kong SAR and bushfires in Australia are likely to negatively impact these markets’ economies. Japan is expected to see a slow start to 2020 as the higher consumption tax will weigh on domestic demand. However, economic momentum is expected to pick up in H2 2020, when the impact of the government’s US$122 billion-fiscal package begins to kick in.

ASIA PACIFIC ECONOMIC TRENDS IN 2020

DEGLOBALISATION

Rising geopolitical tension over the course of 2019 has raised concerns of a shift towards deglobalisation. The recent Phase-One trade deal signifies a temporary truce between the U.S. and China rather than a complete solution. Issues such as intellectual property protection, forced tech transfer and national security remain unsolved. The U.S. is likely to retain its tough stance towards China in 2020, with tension possibly extending beyond trade, as President Trump’s re-election campaign intensifies.

Regional geopolitical tension is likely to persist in 2020 despite improved trade relations between Japan and Korea after the former relaxed export curbs on microchip materials in December 2019. Elsewhere, sociopolitical unrest will continue to inhibit business expansion in the Hong Kong SAR.

DISINFLATION

Inflationary pressure in Asia Pacific will remain limited, with most mature economies set to miss their 2% annual target, and emerging markets forecasted to register inflation that is lower or on par with the past five-year average. This will create room for additional interest rate cuts to prop up regional economies.

China’s inflation surged to 2.9% in 2019, mainly due to a spike in pork prices. However, pressure is moderating amid higher imports and the release of reserve supplies. The CPI is forecasted to remain at around 3% in 2020¹. The adoption of the Loan Prime Rate (LPR) as benchmark interest rate resulted in lower interest rates in 2019, with further downward adjustment expected in 2020.

Other major macro risks for the coming year include a further increase in crude oil prices, with OPEC basket prices increasing by around 30% over the course of 2019. Although OPEC supply is set to increase in 2020, recent tension in Middle East is likely to trigger further oil price fluctuations.

Mirroring the U.S. Federal Reserve, most central banks in Asia Pacific accelerated the pace of rate cuts in 2019. CBRE expects monetary policy to remain loose in 2020, with further interest rate reductions likely. The lower cost of financing will expand the yield spread and strengthen investment appetite.

DEMOGRAPHICS

The longer-term outlook for the regional economy will be shaped by demographic shifts, with low birth rates and ageing populations dragging on employment growth and economic expansion. The impact on the Pacific will be limited but Asian markets are expected to be significantly affected, with the working population in Japan, Korea and Greater China already shrinking. CBRE expects competition for young workers – especially in tier I cities – to intensify in the coming years. More governments will also consider raising the retirement age.

The war for talent will also prompt changes to business strategy. A greater proportion of production capacity will be shifted to markets with more cost-effective and available pools of labour. However, companies will also invest more in technology, especially automation, to enhance productivity and lower reliance on labour. Improving the workplace experience to attract and retain employees will remain at the top of the business agenda.

¹Forecast by CBRE Research as of 08 January 2019