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00:00So this outlook, regional outlook, going for the rest of this year and also even to next year,
00:05it shows resilience if you look back into the first half, but there are some headwinds. Give
00:10us an indication of how the tariff environment and the external environment to Asia is going to
00:15really impact the growth trajectory the rest of this year and into next year. Yes, the first year
00:21is better than expected. There are a number of factors. So some of the factors will stay,
00:28some of the factors were temporary and will unwind. Let me be more specific. So a big
00:34reason why growth is better and we have this resilience relative to early expectations is
00:41that the tariff shock in the end was not quite as big. From the liberation day on April. From April
00:472nd. The numbers are not as bad this time than back then. Yes, factor number one. Factor number two,
00:54the way tariffs have been implemented, right? They were first announced and rolled back with an
01:00expectation that some bit higher tariffs will come. Also created a lot of incentives for what we call
01:07front loading, advancing purchases. And that's a factor that will unwind. The speed is unclear at the
01:14moment. So but we expect some slowing and we have to build in our forecast that over the next, the second
01:20half will unwind. So that's in our forecast, the second half of 2025 will be weaker in most economies,
01:29just because of the trade factor. And that's mostly the unwinding. The other reason that carries into
01:352026, of course, because in the second half, and the other reason the tariff effects will be building a bit
01:42over time, right? You have seen not that much so far. They were announced April 2nd, then revised, revamped,
01:49implemented in the second half, and the full tariff expect will be building into the first half of next
01:55year. So the unwinding of that front loading from the Bloomberg data that we have is that front loading
02:00of orders was quite sizable. But now, given that there is a tariff regime in place, and there could be
02:07as well even an increase if the Trump-Xi meeting does not go, you know, fruitfully for either side,
02:14we could go into a much, much deeper tariff regime. So could that front loading from your research
02:21return? You know, a 10% tariff is very different than an added 100%, right?
02:27It's clearly not built into our baseline. We see what we point out at the moment is the downside
02:32risk to the outlet, right? Trade policy uncertainty, while lower than it was in April, it's still high,
02:39right? And it could accelerate again, as just the past few days have demonstrated. To what extent it
02:46creates front loading, you would need also certain, you would need some certainty, right, to advance
02:52purchases. I think what we would see with uncertainty, right, there has been this desire to hold higher
02:59inventories that has played out. Whether it will play out again, we see that as a risk factor to our outlook.
03:06And there's two-sided risk. We're mostly concerned about the downside risk. But if the tariff situation
03:13improves, if there is some form of trade agreements that will lower the degree of protectionism,
03:22that could create upsides to the forecast. So the numbers we're talking about, 4.6% growth,
03:27that was last year, 4.5% this year. So a little bit slower growth in the second half compared to the
03:34first half. But then 4.1% in 2026. And that's actually a better scenario than what you talked
03:42about in April, right? So what must Asian economies do to build resilience?
03:50So on resilience, there are really two factors. One is in the short term, keep your house in order.
03:55That's what our managing directors say. And that's also that it applies to Asian economies. And there are
04:01two elements. One, I think, is keep exchange rate flexibility. The exchange rate is the shock
04:08absorber. It helps in particular when you have real shocks affecting the real economy. That's one.
04:15Second, on the fiscal side, in many countries, public debt is high. Spending pressures are building.
04:22Build buffers have the room to respond to shocks. That's one element. That's a more traditional macro
04:29policies. The other one is on structural reforms. Here, we would have pointed out several factors.
04:36One, in the region, we have one exposure to one export market in particular that has been affected
04:43by the tariff shocks, the US market. But there is scope for trade liberalization elsewhere. So if you
04:50look at Asia, if you look at intra-Asian trade, what we see, we see a lot of trade in the immediate goods.
04:57It's supply chain related, which are sort of distributed over the region. But if you look at trade
05:03integration in final goods, it's much lower than in other more free trade areas. If you look at Europe,
05:10if you look at the USMCA. And what our research showed, and we have a special chapter in our
05:15regional economic outlook, there are two aspects to it. One, there are non-tariff trade bearers in the
05:22region that particularly also apply to final goods. Second, some of the regional trade agreements are
05:28not as deep as other trade agreements. What does it mean? They cover the same areas, but the provisions
05:37for liberalization don't go as deeply as they do in other agreements. They don't necessarily also have
05:44the institutional mechanism for dispute settlement and so on and so forth. So what the chapter shows,
05:52if trade agreements were to deepen, there's considerable benefits to Asian economies and you
05:58would create more intra-regional trade, which would provide a boost to income and development.
06:04As far as the structural changes that are needed, it doesn't just have to be
06:07how to do trade differently or diversification. It also has to be building domestic demand, particularly
06:16here in China. So how can they better stimulate that engine? China needs to do that. I've spoken to
06:22a number of people here saying they could even possibly set in the next five-year target, not five-year
06:28plan that they're working on right now, set an ambitious target for consumption, household consumption,
06:34as a part of GDP, upwards of 50%. If you have a target, that's one thing I know China's good at,
06:39set a target, they usually hit it. So is that something that is key to this equation as well?
06:45So in general, we point out that in a number of Asian economies, the recovery
06:50from the pandemic has sort of been incomplete or has been lagging on the domestic demand side,
06:55in particular consumption. So in China, it has been a longer story, right? The balance of growth
07:01and sort of the heavy investment bend, the heavy bend towards export, and we have long advocated for
07:08rebalancing growth. There are two legs, so to speak. The analysis is, or the core reason why
07:15consumption is so low is the need for very high precautionary savings by households. That's the
07:20sort of fundamental reason. No safety net anymore, really. The iron rice bowl, locally as it's known.
07:25Yeah. And so what we propose is strengthen the social safety net, right? That's both in terms of
07:32health, it's in terms of pensions, and it's in terms of unemployment insurance, where there is,
07:39for example, in health, there is, in China, there is now a universal healthcare coverage system,
07:44but the benefits, the coverage of what's covered under the scheme is very low. And sometimes,
07:50especially at the local government level with financial strains, coverage has been reduced.
07:54So there's the uncertainty about what is covered. So have a more, a better coverage of household
08:01specific risks for health, pensions, or retirement, and also unemployment would go a long way to reduce
08:10the need for precautionary savings. And then the other thing that you have to, besides the general issue
08:16of social safety net coverage, there are also big rural urban divides, if you look at migrant workers.
08:23So we argue that hooker reform would go somewhere, some way. And in that context,
08:28also greater transfers to the rural population, which, where they are more income or borrowing
08:36constrained than other parts would also go some way. In lieu of boosting that domestic demand,
08:42which could take quite some time as well to unlock those household savings, diversification is also
08:48another trend, right? It doesn't all have to go out of the ports from China to the United States
08:52or to Europe. Already seeing in soybeans, we're seeing coming this way, trade from Argentina,
08:59from Brazil. We're seeing China shipping to Southeast Asia, as you mentioned, the Middle East as well.
09:04So you're seeing significant changes in trade flows, aren't we?
09:08Yes. So that's happening. I think the broader background is that, you know, you have more
09:15so-called South trade. The emerging markets are still growing faster, right? So that portion
09:22of the global economy is growing and creating opportunities for trade. And certainly China,
09:28but also other economies in the region are using this opportunity, and we can see.
09:32What are the biggest downside risks to these projections and the upsides as well? The upside,
09:37I would assume, would be some of the AI investment boom continuing longer than most would think.
09:43That has also helped keep growth in Asia as exporting components to the AI float. But if that falls off
09:50significantly, as some are predicting, could that be one of the biggest shocks to your projections?
09:56It's one, possibly it's a downside risk. So we refer to it as a two-sided risk. I mean, there are
10:02maybe there are downside risks that maybe expectations about what AI can deliver in the next five to 10
10:08years are exaggerated. But there's also upside to it. So much will depend. We list trade remains a big
10:18downside risk. The other factor that has supported resilience in the first half is easy financial
10:24conditions. Even without that much monetary policy easing in 2025. A lot of it was in 2024. There
10:31was some in 2025. Financial conditions have eased. That has also supported investment, has supported
10:38growth. So if there were renewed concerns about risks, and that could be for many reasons, that there's
10:45sort of a risk off event that is more persistent, that will also be a factor we will be concerned about.
10:51And if you're taking the pure size of the Chinese economy, one of the persistent downward pressures
10:56here has been persistent deflation for one because of a price. The anti-involution campaign is kind of
11:02trying to end that rat race down to zero with EVs and other manufactured goods. Overcapacity
11:10is clearly a problem. But really what's deteriorated that wealth confidence or the wealth effect in
11:15China has been the property sector downturn, which it has no end in sight. So that is clearly another
11:20downside risk as far as China's contribution to the scenario that you've portrayed here.
11:25That's correct. And we have pointed out the scope for additional measures. But let me start. The
11:31government has taken measures. On the demand side, they have lowered restrictions for housing purchases.
11:37For secondary homes, for example, they have lowered macro prudential restrictions, including the
11:43household's own money they have to bring to the table before a house can be bought. They have on the
11:48supply side tried to use some of the excess inventory in the market to increase the supply of social
11:54housing, affordable housing. What we have argued that the key why confidence hasn't come back is the
12:02the status of pre-sold but unfinished housing. And where we think the central government needs to
12:08intervene at two levels, right? Either provide mechanisms for the resolution, be it completion of the
12:16housing or some form of compensation. And that has two elements. It has the element of bankruptcy of the
12:23non-viable developer and finding mechanisms then to allow for the completion, right? Through viable
12:31developers or other solutions. But it would require some central government financing, putting through
12:38guarantees or other means. We have in the last article 4 consultation, we made contribution of about 5% of
12:45GDP would go a long way to resolving that sort of sticky issue, which has still been present in the
12:52fourth year of the slowdown. Would you argue that the current talks behind closed doors for the 15th
12:59five-year plan is probably going to be targeting these long-term structural issues, given there doesn't
13:05seem to be an abatement, at least when Donald Trump is under in the White House, an abatement in that
13:10perceived protectionism from the United States and the pressure on the export, which has been a main
13:15pillar? That's correct. We have pointed this out, that China is a very large economy. Relying
13:23on exports as a major source of growth leads to imbalances. Also going forward enables or sort of
13:31continues the trend of these sort of imbalances in the composition of the demand, the reliance on the
13:37global economy. And as China gets bigger and bigger, it will be increasingly more difficult to use the
13:43rest of the world as a source of wealth. You also need to develop your own domestic demand, develop the
13:49domestic economy, the services sector and so forth.
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