Open QuestionsAndrew Tilton on China’s growth prospects, economic trajectory in wake of Iran war

Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs, speaks to the South China Morning Post about the long-term future of China’s economy after the “two sessions” in Beijing and ahead of an expected Xi-Trump summit – all during an oil crisis sparked by the US-Israel war against Iran.

What impact will the oil shock arising from the Iran war have on the growth of Asian economies this year?

Asia is greatly affected by the war as the vast majority of oil and gas exported from the Persian Gulf in normal times goes to Asia. We’ve raised our inflation forecasts more than a percentage point on average since the start of the conflict and cut growth forecasts throughout Asia.

We think Japan, South Korea and China are relatively well insulated – they have significant strategic oil reserves and can afford to subsidise retail fuel prices. In these places we’ve made only small adjustments to our growth forecasts. This means the burden of adjustment to lower energy supply from the Middle East will fall more on other countries.

Several economies in South and Southeast Asia with lower incomes per capita – including but not limited to India, Thailand, the Philippines and Vietnam – rely significantly on foreign energy and are already taking measures to reduce demand or give some end users priority over others. A few have already had to narrow the focus of subsidy programmes to make them fiscally sustainable. In some cases central banks may have to raise interest rates to keep currencies from depreciating. Otherwise, the cost of imported goods could rise more generally. These actions will slow growth.

Will the impact of the Iran war impede China’s efforts to achieve its annual economic growth target? In that sense, do you think China needs more stimulus?

It’s too early to tell the full impact. China certainly had very robust trade leading up to the conflict, judging from the data recently released for January and February. President Xi Jinping has been focused for years on “self-reliance” – reducing China’s reliance on foreign suppliers and reducing its sensitivity to disturbances outside China – so this will be a test of sorts. Although it is a large oil importer, China gets most of its energy from domestic sources, especially coal. Part of its energy imports come from Russia via pipeline. It also has built up a strategic oil reserve and can leverage state-owned enterprises and the government budget to cushion the impact of higher energy prices on consumers.

Oil and natural gas prices are up very sharply, so there will still be some modest upwards pressure on inflation in China in the coming months. This makes rate cuts by the People’s Bank of China less likely than they seemed before the war.

Policymakers might also decide to increase government spending a little further if they see an impact on growth. Higher prices for imported energy will also reduce China’s trade surplus, other things being equal, though it is still likely to be very large.