July Macro Economy Review

  • China exports fell 4.8% in June from same month a year ago by USD terms,  compared to a 4.1% year on year drop in May, according to data released by the General Administration of Customs. Imports dropped 8.4% year on year in June, compared with 0.4% year on year drop in May, the data showed. Trade surplus shrank 4% to USD48.1 billion in June from May’s USD 50 billion. (July 13)

  • Japan government lowered real GDP growth forecast today to 0.9% for 2016 from earlier forecast of 1.7%, nominal GDP growth rate still maintained at 2.2% for the year  (July 13)

  • Malaysia central bank cut benchmark interest rate by 25 basis points to 3% today (July 13)

  • Singapore economy expanded 0.8% in the second quarter from the first quarter this year, it grew by 2.2% from the same quarter a year ago. The GDP growth rate is slightly higher than the first quarter’s 2.1% year on year growth (July 14)

  • South Korea central bank kept interest rate unchanged at record low today (July 14)

 Standard Chartered Economist on Brexit’s Impact on EM

Brexit, the UK vote to exit the European Union (EU), has sparked another round of risk aversion. What is the impact of Brexit for the rest of the world? For emerging markets, it is mostly indirect, said Marios Maratheftis, chief economist of Standard Chartered Bank, on Brexit impact on the region and emerging markets.

The bigger impact will be on the UK itself. The UK runs a massive current account deficit of more than 5% of GDP, making it dependent on foreign capital inflows. The problem is that political uncertainty in the UK could discourage foreign investors, which leaves the pound looking vulnerable. Lower growth in the UK, and particularly in the euro area, will probably lead to slower trade growth. This creates downside risks for growth for exporters. And if confidence deteriorates further, other economies may begin to be affected, Maratheftis said.

The US dollar is an important channel of Brexit crisis transmission. The dollar tends to appreciate at times of elevated risk aversion and/or at times when the Federal Reserve (Fed) is hiking rates. Lower risk appetite should keep the dollar supported. But if, as we expect, the Fed does not hike interest rates further, then a US dollar rally could lose momentum. This should keep the pressure on the Chinese yuan (CNY), and emerging markets in general, manageable, said Maratheftis.

The main global economic risk, however, is that growth was low to begin with. Sluggish growth makes it harder for the world economy to deal with shocks. These risks explain why we expect some retreat. But at the same time we expect emerging markets to regroup and rebound, especially in Asia. Brexit is a shock, and global growth is not strong enough for us to ignore such a shock. But Brexit is mainly a UK and European problem, albeit with broader implications. Our expectations for fundamentals and policy suggest that sentiment towards emerging markets should improve quickly, Maratheftis said in a report on Brexit’s impact on Asia and the emerging markets. (July 20)