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20-01-2012, 08:15 AM
The Straits Times
Jan 20, 2012
NEWS analYSIS
Asia slipping into neutral economic gear
Growth is too slow to help global economy, too fast to need stimulus
By Emily Kaiser
ASIA'S economic growth may be settling into a middling pace that is too slow to provide significant global support but too fast to warrant aggressive policy easing.
Most of the region's emerging economies have space to cut interest rates or boost government spending to counter the impact from the global slowdown.
That is in sharp contrast to the developed world where the United States, Britain, Japan and others have long since pushed benchmark borrowing costs down to near zero, while swollen budgets provide little scope for stimulus.
But the latest batch of economic data out of Asia showed growth was not slowing quite as precipitously as many economists had feared. This bolsters the wait-and-see case, particularly when the biggest economic threat - Europe's debt crisis - is so difficult to predict.
'The data still suggests that we're losing momentum, but we're not losing momentum in a rapid deterioration that requires immediate action,' said Mr Claudio Piron, emerging Asia rates strategist with Bank of America-Merrill Lynch.
Take China's fourth-quarter growth figures, for example. Although the year-on-year rise of 8.9 per cent was the slowest since mid-2009, it was still a bit stronger than economists polled by Reuters had predicted.
In India, a measure of factory activity picked up far more than expected last month, alleviating fears that the economy was unravelling.
Yet gross domestic product growth has slowed dramatically and is likely to worsen in the current quarter.
Singapore's non-oil exports surged 16.4 per cent last month, more than four times the consensus forecast in a Reuters poll. But economists still think the city-state is slipping into at least a brief recession.
That muddles the policy picture.
'It seems easiest for policymakers across Asia to do nothing,' Mr Peter Eadon-Clarke, Asia economist at Macquarie, wrote in a note to clients.
For global investors looking to Asia to pick up the slack for faltering Europe and the sluggish US, this sort of 'not terrible but not great' economic growth is the worst of both worlds.
The World Bank slashed its global forecast on Wednesday, predicting the economy would grow just 2.5 per cent this year and 3.1 per cent next year.
While most of that reflected a gloomier outlook for the advanced economies, the World Bank also downgraded its assessment of developing economies and warned them to start contingency planning in case of another global slump as bad as the 2008 financial crisis.
But unless such a threat materialises, Asian officials seem content to proceed slowly.
Mr Piron, who spoke to Reuters from Kuala Lumpur where he was visiting clients, said investors had begun paring back expectations for rate cuts out of South Korea, Malaysia and Thailand, an acknowledgement that policy easing may be more gradual and selective.
Oil prices remain above US$100 per barrel even with global economic prospects looking shaky, which suggests inflation pressures could become a problem again if growth picks up later this year, as many economists expect.
Inflation has come down sharply across Asia over the past six months, but some of that simply reflects the fact that prices started climbing in late 2010, so year-on-year comparisons look better.
The root causes of inflation persist.
Unemployment is low, pushing up wages in countries such as China. Rising incomes mean people can afford to spend more on food, increasing demand for meat and the crops that feed the livestock.
All of that adds to policymakers' hesitancy. Some investors might be disappointed by the gradual approach, but most Asian economies can afford to take their time because monetary policy settings remain relatively loose.
Benchmark interest rates across the region remain below where they were in 2008, just before the bankruptcy of Lehman Brothers triggered a deep global recession. Even in India, where the central bank has raised rates 13 times since March 2010, interest rates are still slightly below the 2008 peak.
Central banks in Indonesia, Thailand and Australia started easing late last year, while China reduced banks' reserve requirements to try to spur more lending. More cuts are expected this year from India, Indonesia, the Philippines and South Korea.
But in a Reuters poll published yesterday, economists thought the easing cycle may be brief. In Australia, for example, they predicted one more interest rate cut in the first quarter of this year, but thought rates would be right back where they are now by the middle of next year.
The pattern was the same for Indonesia and South Korea, with at least one rate cut expected this year before central banks start tightening again next year.
Both China and India appeared to be focused on assuring there was sufficient cash to keep financial markets operating smoothly, rather than cutting interest rates to prepare for an impending slowdown, Mr Piron said.
India has also used open market operations to try to stabilise its bond market in recent weeks.
China's central bank injected money into the market twice this week to meet demand for cash ahead of the week-long Chinese New Year celebrations, which begin on Monday.
'In a volatile 2012, the most important thing for Beijing is to be flexible and open-minded,' economist Ting Lu of Bank of America-Merrill Lynch wrote in a note to clients.
REUTERS
Jan 20, 2012
NEWS analYSIS
Asia slipping into neutral economic gear
Growth is too slow to help global economy, too fast to need stimulus
By Emily Kaiser
ASIA'S economic growth may be settling into a middling pace that is too slow to provide significant global support but too fast to warrant aggressive policy easing.
Most of the region's emerging economies have space to cut interest rates or boost government spending to counter the impact from the global slowdown.
That is in sharp contrast to the developed world where the United States, Britain, Japan and others have long since pushed benchmark borrowing costs down to near zero, while swollen budgets provide little scope for stimulus.
But the latest batch of economic data out of Asia showed growth was not slowing quite as precipitously as many economists had feared. This bolsters the wait-and-see case, particularly when the biggest economic threat - Europe's debt crisis - is so difficult to predict.
'The data still suggests that we're losing momentum, but we're not losing momentum in a rapid deterioration that requires immediate action,' said Mr Claudio Piron, emerging Asia rates strategist with Bank of America-Merrill Lynch.
Take China's fourth-quarter growth figures, for example. Although the year-on-year rise of 8.9 per cent was the slowest since mid-2009, it was still a bit stronger than economists polled by Reuters had predicted.
In India, a measure of factory activity picked up far more than expected last month, alleviating fears that the economy was unravelling.
Yet gross domestic product growth has slowed dramatically and is likely to worsen in the current quarter.
Singapore's non-oil exports surged 16.4 per cent last month, more than four times the consensus forecast in a Reuters poll. But economists still think the city-state is slipping into at least a brief recession.
That muddles the policy picture.
'It seems easiest for policymakers across Asia to do nothing,' Mr Peter Eadon-Clarke, Asia economist at Macquarie, wrote in a note to clients.
For global investors looking to Asia to pick up the slack for faltering Europe and the sluggish US, this sort of 'not terrible but not great' economic growth is the worst of both worlds.
The World Bank slashed its global forecast on Wednesday, predicting the economy would grow just 2.5 per cent this year and 3.1 per cent next year.
While most of that reflected a gloomier outlook for the advanced economies, the World Bank also downgraded its assessment of developing economies and warned them to start contingency planning in case of another global slump as bad as the 2008 financial crisis.
But unless such a threat materialises, Asian officials seem content to proceed slowly.
Mr Piron, who spoke to Reuters from Kuala Lumpur where he was visiting clients, said investors had begun paring back expectations for rate cuts out of South Korea, Malaysia and Thailand, an acknowledgement that policy easing may be more gradual and selective.
Oil prices remain above US$100 per barrel even with global economic prospects looking shaky, which suggests inflation pressures could become a problem again if growth picks up later this year, as many economists expect.
Inflation has come down sharply across Asia over the past six months, but some of that simply reflects the fact that prices started climbing in late 2010, so year-on-year comparisons look better.
The root causes of inflation persist.
Unemployment is low, pushing up wages in countries such as China. Rising incomes mean people can afford to spend more on food, increasing demand for meat and the crops that feed the livestock.
All of that adds to policymakers' hesitancy. Some investors might be disappointed by the gradual approach, but most Asian economies can afford to take their time because monetary policy settings remain relatively loose.
Benchmark interest rates across the region remain below where they were in 2008, just before the bankruptcy of Lehman Brothers triggered a deep global recession. Even in India, where the central bank has raised rates 13 times since March 2010, interest rates are still slightly below the 2008 peak.
Central banks in Indonesia, Thailand and Australia started easing late last year, while China reduced banks' reserve requirements to try to spur more lending. More cuts are expected this year from India, Indonesia, the Philippines and South Korea.
But in a Reuters poll published yesterday, economists thought the easing cycle may be brief. In Australia, for example, they predicted one more interest rate cut in the first quarter of this year, but thought rates would be right back where they are now by the middle of next year.
The pattern was the same for Indonesia and South Korea, with at least one rate cut expected this year before central banks start tightening again next year.
Both China and India appeared to be focused on assuring there was sufficient cash to keep financial markets operating smoothly, rather than cutting interest rates to prepare for an impending slowdown, Mr Piron said.
India has also used open market operations to try to stabilise its bond market in recent weeks.
China's central bank injected money into the market twice this week to meet demand for cash ahead of the week-long Chinese New Year celebrations, which begin on Monday.
'In a volatile 2012, the most important thing for Beijing is to be flexible and open-minded,' economist Ting Lu of Bank of America-Merrill Lynch wrote in a note to clients.
REUTERS
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