Get Ready for Trade War Pain to Spread Through Asia

(Bloomberg) — China’s slowing economy amid weaker export growth will spill over to the rest of Asia in 2019 and drag the region’s growth rate down by 30 basis points.

That’s the forecast by Bank of America Merrill Lynch (NYSE:) economists led by Helen Qiao, showing how manufacturing powerhouses like South Korea and Taiwan will be caught up in the U.S. and China trade war.

Even countries less exposed to China’s supply chain, such as Australia and India, will feel the brunt given the uncertain sentiment among businesses and consumers, Qiao wrote in a note.

China’s $12 trillion economy will now likely slow to 6.1 percent in 2019 from an originally expected 6.4 percent, according to BAML. It forecasts growth of 5.4 percent for the Asia Pacific region as a whole next year, down from its original outlook for 5.7 percent.

That matters because the Asia Pacific region accounts for more than 60 percent of global growth, according to the International Monetary Fund. The IMF is due to release fresh forecasts next week and Managing Director Christine Lagarde has already warned of materializing economic risks.

Critically, Asia’s policy response will face limitations. That’s because ongoing interest rate hikes by the Federal Reserve means there’s less scope for central banks to ease policy.

They face a choice of raising rates to support their currencies and keep pace with the Fed, or lower rates to stoke growth — and the risks that come with that.

“Unlike China, most APAC countries have limited room to ease on the monetary side as the U.S. continues to tighten,” the BAML economists wrote.

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