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Goldman Sachs

China 2019 outlook: Testing resilience

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China 2019 outlook: Testing

resilience

nAs headwinds to growth and confidence gather, Chinese policymakers have been flexible in easing policy to buffer the slowdown. But a big uncertainty that the market is grappling with concerns the economic roadmap farther out. Worries about a possible comeback of the debt-driven growth model, and/or a diminished economic role of private enterprises, weigh heavily on investors’ minds.

nFor 2019, we expect the government to lower the GDP growth target modestly to “6.0-6.5%” (vs. “around 6.5%” this year), and eventually achieve 6.2% full-year GDP growth. This will not be an easy task, as policymakers need to strike a fine balance between averting a sharp slide in growth and preventing a fast debt buildup.

nBroad fiscal policy will likely be the preferred tool to stabilize growth (with off-budget fiscal deficit ramping up as needed). As consumption and export growth is likely to slow, we expect fixed investment—especially infrastructure—to accelerate on policy support and be a key leader in growth.

nCPI inflation will likely increase, but remain within the PBOC’s tolerance zone. This should allow scope for the dovish monetary policy stance to extend and push market rates moderately lower. We expect CNY to weaken in a managed way and ultimately breach 7.0 against the USD in the coming months, barring major positive developments on the US-China trade relationship.

nFurther ahead, however, policy focus needs to shift from cyclical stimulus to deeper structural reforms to ensure sustainable growth. For instance, augmenting the social safety net would be key to bolstering consumption in the long run. Tackling the financial system’s structural inefficiencies such as the continued large presence of zombie state-related enterprises would be more effective than targeted micro assistance in protecting financing supply to the private sector. On the external side, laying a stronger foundation for capital account liberalization (e.g., with a more market-oriented CNY) would provide a big boost to the global status of China’s capital markets. Although these reforms may take time to show their economic benefits, concrete policy actions would likely be received favorably by the market.

Exhibit 12: Markets’ early-2018 growth optimism has faded rapidly

Exhibit 13: Fading credit impulse would continue to shave growth

next year

Percent, month-over-month annualized, 3mma							Percent	Percent change, 4qtr mov avg						Percent change, 4qtr mov avg
11		Composite China market-implied growth indicator					11	1.0								1.0
									Aggregate credit impulse to nominal activity:
10		China CAI					10	0.5								0.5
9							9	0.0								0.0
8							8
								-0.5								-0.5
7							7
6							6	-1.0								-1.0
5							5	-1.5		Baseline (assuming new borrowing stays at Aug-Oct pace)						-1.5
4							4	-2.0								-2.0
								12	13	14	15	16	17	18	19
11	12	13	14	15	16	17	18

Source: Goldman Sachs Global Investment Research, Bloomberg

Source: Goldman Sachs Global Investment Research

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Goldman Sachs

India 2019 Outlook: Striving for convergence

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*Link to full publication: India 2019 Outlook: Striving for convergence

Softer momentum but still strong growth: We forecast India’s economic growth at 7.3% and 7.6% in FY19 and FY20, respectively, a tad lower than we had previously forecast. However, we believe India has a long way to go and will have to lift its growth path to catch up in the process of convergence with other emerging economies.

Subdued inflation so far but likely to pick up later next year: We forecast headline inflation at 4.3% and 5.1% for FY19 and FY20, respectively. We expect some pick-up in food inflation later next year, as favorable base effects begin to wane, and momentum builds up from stronger agricultural support prices and rural wages, and a possible comeback of vegetable inflation.

RBI expected to remain on hold until early 2019 due to (i) exceptionally soft food inflation so far, (ii) softer momentum in India’s growth, and (iii) a significant change in the global environment since the last monetary policy meeting, with lower oil prices and stronger INR. RBI, however, may come under pressure to hike policy rates later in 2019. Our RBI rate call remains hawkish relative to the market: a total hike of 75 bps in 2019.

The fiscal and external outlooks continue to pose challenges for India. We forecast the consolidated fiscal deficit for FY19 at 6.6% of GDP compared with the budgeted target of 5.9% of GDP. With GST collections and divestment receipts running low, there are upside risks to our forecast. On the external side, we forecast the current account balance to worsen from -1.9% of GDP to -3.0% of GDP in FY19. Thereafter, we see a little improvement, projecting the current account at -2.8% of GDP in FY20, driven primarily by a favorable oil balance.

Political uncertainty ahead of elections clouds our macroeconomic outlook. India’s

election calendar has kicked off with five states currently going into polls, and general

elections scheduled for May 2019.

India 2019 outlook: Striving for convergence

Our main forecasts

		Fiscal year (%yoy)	FY18	FY19f	FY20f
		Real GDP	6.7	7.3	7.6
		CPI inflation (average)	3.6	4.3	5.1
		Current account balance (% of GDP)	-1.9	-3.0	-2.8
		Repo rate (%, eop)	6.00	6.50	7.25
		FX (USD/INR, eop)	65.0	74.0	71.0

Source: Goldman Sachs Global Investment Research

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2019 outlook for Asian exporters: Three potential global headwinds

*Link to full publication: 2019 outlook for Asian exporters: Three potential global headwinds

nWe envisage three potential global headwinds to weigh on the growth outlook of Asian exporters in 2019. They include moderating global growth, further Fed hikes, and possible escalation in trade tensions between the US and China. Given the heavy reliance of Asian exporters on global growth and trade, these headwinds would likely be dominant factors affecting economic growth in 2019 for Korea, Malaysia, Singapore, Taiwan, and Thailand.

nGrowth performance of Asian exporters would also be affected by idiosyncratic factors. They include a slowing memory chip cycle for Korea and general elections in Thailand. Fiscal policy would vary across countries, ranging from a positive impulse in Korea to a broadly neutral impact in Taiwan and continued tightening in Thailand and Malaysia. Geopolitical risks remain a watch factor for Korea and Taiwan.

nWith GDP growth moderating and inflation staying at moderate levels for most Asian exporters, we expect only moderate monetary tightening over the coming year. In 2019, we expect one 25bp policy rate hike in Korea and Thailand, as well as three 12.5bp rate hikes in Taiwan, assuming cumulative hikes of 100p in the Fed funds rate, mostly on the desire to restrain financial imbalances and limit rate differentials with the US. Malaysia is the only country where we expect no changes to the central bank policy rate. We expect another 0.5% increase in Singapore for the forex slope in Q2 on above-trend growth and rising inflation.

nThe most pertinent risk to our macro forecasts for Asian exporters is probably the direction of the USD. A weaker USD in the face of successive Fed hikes would pose an upside risk to our growth forecasts while further dollar appreciation, which is not our baseline forex view, would be incrementally negative for our forecasts. A possible escalation of trade tensions would be detrimental to Asian growth in the short term by reducing demand for Asian exports and weighing on investment.

Exhibit 14: Impact of the three drivers of Asian exports in 2019

Percent change, yoy

Percent change, yoy

25							Real exports growth for Asia exporters								25
20															20
15															15
10															10
5															5
0															0
-5															-5
-10															-10
-15	US - China trade tensions					Others					Slowdown in Chinese imports				-15
-20	Trade partner FX					Trade partner GDP growth					Real exports growth				-20
2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	2019

Note: Shaded area in blue denote GS forecasts; Assuming that US imports from China are reduced by the tairff rates

Source: Haver, Goldman Sachs Global Investment Research

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EM Macro Navigator

Oil Drop — The implications of lower oil prices for growth, inflation and monetary policy

*Link to full publication: Oil Drop — The implications of lower oil prices for growth, inflation and monetary policy

nOil prices have fallen by more than 30% from their peak in mid-October and are around 20% lower than their Q3 average. If sustained, a fall of this size is likely to have material effects on the outlook for growth, inflation and monetary policy.

nGrowth: Oil prices – unsurprisingly – have sharply different effects on the output of oil exporters and importers. For oil importers, we find that a 20% fall in prices typically boosts the level of output by around 0.6-0.8pp, all else equal, with the biggest impact on growth occurring with a lag of around 3-4 quarters. For Russia, our estimates imply that a 20% fall in oil prices has historically reduced output by around 1.6pp over a period of 2-3 years, although the sensitivity may now be lower (due to changes in how the Russian authorities respond to oil prices).

nInflation: The effects of oil price changes on inflation are more uniform, with the pass-through to the level of CPI – including second-round effects – ranging from 4% to 8% over 2-3 years. Thus, a 20% decline in oil prices implies a 0.8-1.6pp reduction in the level of consumer prices, all else equal, with relatively large effects in Hungary, Romania and Turkey, and relatively small effects in the Czech Republic and Israel. In contrast to the effects on growth, most of the impact on consumer prices feeds through relatively quickly (within 1-2 quarters), with the result that average inflation in 2019 is likely to be 0.5-1.0pp lower in most CEEMEA economies owing to the decline.

nMonetary policy: While central banks tend to focus more on core inflation than headline, the ability of EM central banks to ‘look through’ fuel-driven fluctuations in consumer prices is constrained by two factors: (i) the weight of fuel in CPI is typically larger in EM than in DM economies; and (ii) the credibility of EM monetary policymaking is also more limited, implying stronger second-round effects from headline to core. Thus, the fall in oil prices since mid-October is more important for EM than for DM interest rate prospects. The decline hence supports our relatively dovish views on CEEMEA monetary policy in 2019. We expect inflation to significantly undershoot central bank forecasts in Poland, the Czech Republic and South Africa. For Turkey, the fall in prices is bringing significant relief to inflation and the balance of payments. In Russia, the implications for monetary policy are more mixed, as the decline in oil prices is also contributing to a weaker Ruble.

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