Chamber in Review
Nothing to Fear but Fear Itself
Michael Spencer, Chief Economist and Head of Research, Asia Pacific at Deutsche Bank

Michael Spencer, Chief Economist and Head of Research, Asia Pacific at Deutsche Bank

Investors and economists are in disagreement about the prospects for 2019 amid the trade tensions between the United States and Mainland China. Michael Spencer, Chief Economist and Head of Research, Asia Pacific at Deutsche Bank, explained the reasons behind this disconnect and shared his own thoughts on the global economic outlook at a Chamber roundtable luncheon on 11 January.  

From the point of view of economists like himself, Spencer said, “there is nothing to fear.” 

He explained that growth had peaked around 18 months ago and there had been a slowdown since then, but it was almost imperceptible. Looking at the major markets of the U.S., Europe and Japan, economists are predicting a continued, but slight, slowing of growth. Both the U.S. and Europe are also experiencing a tight labour market, rising wages and low interest rates, which have a positive impact on investment and household consumption.

“What’s important in all of these numbers is that there are no negative numbers,” he said. The predicted slowdown will have an impact on Asia, as most Asian economies are exporters, but “nothing catastrophic.”

Yet, investors have a less sanguine outlook, reflected in falling stock markets in recent months. So why are they so much less confident, given the unremarkable data? 

“What is driving this pessimism is not the economic environment; it is the political environment and political insecurity,” Spencer explained. “Uncertainty about the economic outlook has a real input on financial markets,” he added.

What is driving this uncertainty right now, according to Spencer's research, is trade policy, which is a new and significant source of uncertainty. So while there is little evidence in the numbers that the trade war has had an impact, the “fear itself” generated by the uncertainty is affecting investor sentiment. 

Spencer anticipates that the current truce between Washington and Beijing will hold and that there will be an agreement not to increase the current tariffs. “Donald Trump has seen the equities sell-off and does not want to be blamed for pushing the U.S. economy into recession.” 

Turning to the Chinese Mainland, Spencer sees a similar picture of gradually slowing growth. He noted that for 10 years investors have been predicting a crisis which never arrived. Most recently, they have been citing the recent collapse in auto sales as evidence, but Spencer pointed out that non-auto sales have remained steady. 

As for Mainland Chinese property – is it the world’s biggest bubble or is there something real there? “I’m in the second camp,” he said. There have been periods where the market got frothy, Spencer said, but he does not believe that this is the current situation. 

In general, he said: “China is slowing in a very healthy way.” 

Spencer concluded his global tour in Hong Kong, where the outlook is not so bright. “Recession is possible later this year,” he said. This is not as a result of the trade war, however, but because of the decline in the property market.

“My expectation is that there will be a 15% drop from peak to trough,” he said. “So I’m expecting a further 8% fall.”

He explained that there is a very strong property wealth effect in Hong Kong and consumption is closely correlated to the real estate market. This anticipated drop in property value means that there would be no growth in household consumption this year, enough to have an impact on the city’s economy, Spencer said. 

An unsettling note to conclude on for Hong Kong amid an otherwise reassuring view of the global economic outlook.