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Downside risks seen in 5 major economies this year and next: SMU survey

Kok Xinghui

(Sept 11): How will the five largest economies in the world perform over the next few years? If there is a surprise to the GDP growth forecasts for this year and next, survey participants expect that to be tilted to the downside.

This will be followed by a more balanced growth environment in 2021. But participants seemed to lean toward a more balanced risk assessment on headline inflation from 2019 through 2021, with the exception of the Euro Area, where a modest majority view greater disinflationary risks in 2019 and 2020.

These were among the results of the inaugural Big5 survey released on Wednesday morning by David Fernandez, Director of the Sim Kee Boon Institute (SKBI) for Financial Economics at the Singapore Management University (SMU), and Thomas Lam, Principal Researcher at SKBI.

Of the five economies studied, the Euro Area appeared to be most at risk in the multi-year outlook. This was followed by Japan, the United States, China and India, whose economy the participants thought were least at risk.

The five economies were chosen by researchers because in collective terms, these five have a purchasing power parity of more than 55% of the global GDP.

Participants thought China’s real GDP growth for 2019 would be a mean of 6.2% compared to 5.9% in 2020; 1.1% in Euro Area for this year and next; 6.8% for India this year and 6.9% next; and 0.9% for Japan this year and 0.5% in 2020.

SKBI is a think tank within the university for applied financial research in financial markets that is driven by industry and societal needs in Singapore and the region.

The multi-year survey on the "Big 5" economic indicators was conducted last month and the participants were the Bank of Singapore, DBS Group, GIC, ING Bank NV, Moody’s Investors Service, TD Securities, UBS and United Overseas Bank Group.

Broadly, survey participants expected the risks to GDP growth to be tilted to the downside in 2019 and 2020 followed by a more balanced growth environment in 2021. But participants seemed to lean toward a more balanced risk assessment on headline inflation from 2019 through 2021, with the exception of the Euro Area, where a modest majority view greater disinflationary risks in 2019 and 2020.

Lam said his read of the survey was that while the tone is generally cautious, it is not necessarily gloomy. “Although there are downside risks to growth, there is also room for policy measures to potentially offset any surprises.”

On monetary policy, all participants expected China, India, US and Euro Area to have a looser approach this year, but they were split evenly on whether Japan would loosen its monetary policy or keep it on hold.

Next year, the majority of participants expected to see monetary policy still remain loose in China, US and the Euro Area while Japan keeps them on hold. Participants were split evenly on whether India will be on hold or would loosen next year. For 2021, China, Japan, US and the Euro Area are expected to be put them on hold while India should either hold or tighten.

Participants also seem to think these economies are more likely to make changes to monetary policy instead of fiscal policy, indicating they did not think any slippages in growth would be significant or both levers would be used instead of just leaning on monetary policy.

When it came to business cycles, six out of eight participants expected to see a recession in the Euro Area by 2021, while only three thought that would happen in the US and four thought so for Japan. The outlook is expected to worsen for 2022, with six out of seven predicting a downturn in the US and the Euro Area, while four out of seven expect that for Japan.

On the contrary, the outlook for China and India is brighter. Six out of eight did not expect to see a sharp slowdown there in 2021. Participants also defined the “sharp slowdown” by real GDP growth declining by roughly one percentage point in China and less than two percentage points in India while a smaller number defined this as less than one percentage point for China, and roughly two percentage points for India.

Researchers also noted that perhaps in light of reduced policy leeway, participants anticipate policymakers in Japan to be generally more reluctant on pursuing additional policy stimulus (monetary and fiscal). Although participants appear to view Euro Area policymakers to be less hesitant on fresh stimulus measures (monetary and fiscal), policy efficacy might be an increasingly crucial issue going forward.