Brace for tougher times should trade war escalates

By SHAZNI ONG / Pic By TMR

Countries should be prepared and find support to face tougher times, should the trade war between the US and China escalate.

Allianz SE chief economist Prof Dr Michael Heise (picture) said the trade war between the two countries could even threaten the Malaysian economy, a situation comparable to the recent interest-rate hikes by the US Federal Reserve (Fed).

“The trade spat that could emerge is the biggest risk for Malaysia.

“The harm that would be done to the two dominant economies of the world, the US and Chinese economy, is going to have very negative repercussions for all the suppliers, indirectly into both of these economies,” he told the press after presenting the latest Allianz Global Wealth Report yesterday.

Heise said there might be some benefit because some companies may relocate, maybe out of China into Malaysia or other Asian economies, to prevent or avoid tariffs. However, this small benefit is going to be much outweighed by the contraction in demand to huge economies.

Moving forward from the possible escalation of the trade war between the two economic giants, Heise said it is important for countries to find new partners due to the possible changes in terms of trade and global capital flows.

Heise added that many European countries are doing a similar partnership approach, citing the recent European Union (EU)-Japan Economic Partnership Agreement and the EU-Canada Comprehensive Economic and Trade Agreement as examples.

He said countries should improve the conditions for trade as much as possible.

“Therefore, they should be open to liberalising and enhancing trade and investments of Malaysia and other Asian countries.

Heise is hopeful that the contraction or the flow of capital out of Malaysia and other emerging markets could reach an end, and maybe even correcting, before changing course in the next few years.

“We don’t know what the Fed is going to do, but I would argue this. This is something which occurs every now and then, that we have these interest-rate cycles. You have to be prepared and resilient.

Heise said Malaysia could, but should not just rely on the higher oil prices, should the trade war escalate further.

“That gives stability, definitely. Presently, the commodity and oil markets are in an upswing, and that has a lot of political reasons to it with the issues around Iran and problems in Venezuela and Nigeria, and now with the issue with Saudi Arabia.

“Another concern for oil markets — you should not rely on these high prices, if some of these political issues change, then maybe the oil prices change as well.

Meanwhile, speaking to The Malaysian Reserve on the sidelines of the presentation, Heise said there are no warnings on a possible slower global growth — even for a recession, from the current economic outlook.

“Presently, it doesn’t look like we are on a course to recession. The risk is certainly in the ups and downs of the US economy.

“The expansion is very, very strong presently and policies are pushing it. This is not sustainable.

He said over time, a correction in policies and interest rates might occur.

“After nine years of expansion in the US, it would not be surprising to see a peak of the cycle and a downturn in the US economy.

“The data are still good and the overheating is not yet so excessive — so to pronounce that we would see profits collapsing or these typical signs of overheating, we don’t see them yet.

He said there will be continuing expansion in the US economy in 2019, which might possibly be followed by a downturn in 2020 that would affect the world economy too.

“So, the risk of a recession, I think, is an issue more for 2020 than for 2019,” he said.