Author: CHUNG Yoon Ngan
Date: 07-30-12 22:12
On the rebound
By Karl Wilson
July 27, 2012 - 10:21am http://www.chinadailyapac.com
After struggling through the first six months of 2012, most Asian economies hope to see some modest gains in the second half.
In early July, the Manila-based Asian Development Bank cut its growth forecast for developing Asia from 6.9 to 6.6 percent, citing Europe’s financial crisis, the slow pace of the US recovery and lower growth in China and India.
In China, long seen as Asia’s growth engine, gross domestic product (GDP) hit 7.8 percent in the first six months, down from 9.6 percent in the same period last year. This was China’s slowest growth rate since the first quarter of 2009.
The International Monetary Fund (IMF) in its mid-year review published on July 16 cut its 2012 growth outlook for China by 0.2 percentage point to 8 percent and India’s from 6.9 to 6.1 percent.
IMF says emerging markets, long a global bright spot, were being dragged down by the economic turmoil in Europe.
While Asia would still outperform other regions, its growth will be below potential, analysts say.
Singapore’s trade-driven economy, for example, contracted 1.1 percent in the second quarter, compared with the previous three months. The ministry of trade and industry said the slowdown followed a 9.4 percent expansion in the first quarter. Manufacturing was the worst hit, shrinking 6 percent on a decline in biomedical output, compared with a 21 percent expansion in the first quarter.
Singapore relies on manufacturing — mainly pharmaceuticals, electronics, aerospace, oil rig construction and petrochemicals — for about 27 percent of its output.
Compared to a year ago, GDP grew 1.9 percent, still within the government forecast of 1-3 percent expansion for the whole year and better than the first-quarter growth rate of 1.4 percent on the year.
Until this year, Singapore, a bellwether for Asia due to its sensitivity to demand from Europe and the US, had been reasonably resilient, weathering the storm from the eurozone by diversifying across a range of sectors, including oil and gas, pharmaceuticals and electronics.
The headwinds, however, are proving too strong. Weakening demand for Singapore’s key exports — electronics and pharmaceuticals — was the main drag on second-quarter growth, the DBS Group Research says in a recent report.
“The simultaneous surges in electronics and pharmaceutical productions that drove GDP growth in the first quarter are not sustainable amid the global demand weakness,” the report says. “Europe remains the biggest risk and a fading growth momentum in the US is certainly not helpful.”
While inflation has been benign, food prices are raising some concern.
In the past eight weeks, corn, wheat and soybean prices have risen more than 50 percent on the back of the worst drought to hit the US farm belt in half a century. The US accounts for more than a third of global corn production.
For Asia, where food is a significant component of the consumer inflation basket, food prices are critical to sustained economic growth.
Tai Hui, head of regional research in Asia for the Standard Chartered Bank, says if the recent price rises in some grains are sustained for the next two to three months, “we might see an impact on inflation early next year”.
“The time lag for global food prices to get passed to local inflation is typically six months,” he tells China Daily Asia Weekly.
Frederic Neumann, co-head of Asian economics with HSBC, says: “Asia is particularly jittery about this as memories of the 2008 food price scare sit deep.”
He says a number of economies, notably China and India, are counting on cooling price pressures to make room for further monetary easing.
Tao Dong, chief regional economist for non-Japan Asia, Credit Suisse, says despite the “mixed data” coming out of China, the economy is “within the soft landing range”.
China’s industrial production in June rose 9.5 percent year on year, similar to the previous month’s 9.6 percent. Fixed asset investment was up 21 percent year on year compared with 19.8 percent in May, coinciding with the government resuming lending to local investment vehicles.
Retail sales in June softened to 13.7 percent year on year from 13.8 percent in May.
Tao says while the data sent mixed signals, fixed investment is showing tentative signs of rebounding, though industrial production and retail sales remain weak.
He says growth in the first half was not as bad as many had first forecast. It was helped by a better trade balance and a pickup in investment, especially in infrastructure.
“While the risk of a hard landing has subdued, there is no sign yet of a catalyst that will drive up the economy,” Tao says.
He does, however, expect the central bank to cut interest rates again, but warns the impact may be limited as the economy is in a “liquidity trap”.
“Inflation is down across the region,” says HSBC’s Neumann.
He says this is “clearly good news” as it provides relief to hard-pressed households and companies that have struggled with soaring prices recently. Neumann adds that the boost in purchasing power and investment sentiment alone should provide a “palpable lift” to demand over the second half of this year.
He gives oil as an example: With most benchmarks down $20-$30 from recent peaks, a substantial kick to national purchasing power is in the works.
While growth was weak in the first half of the year, Neumann is optimistic about a rebound over the second half. And while inflation risks appear to be contained, and growth still wobbly, “it’s tempting to think that central banks will cut rates across the region to shore up growth”.
The Bank of Korea’s decision to cut interest rates in early July by 25 basis points to 3 percent took the market by surprise and economists expect a further cut within the next few months.
In India, analysts expect another cut in the third quarter. In April, the Reserve Bank of India cut the repurchase rate from 8.5 to 8 percent — its first rate cut since 2009.
Monetary easing may possibly come through in Indonesia and Thailand also.
Neumann says it is unclear whether rate cuts are the most appropriate response to Asia’s slowdown. He cites reasons, including that interest rates are already low, and the cost of capital is constraining growth, with credit expansion, particularly in the Association of Southeast Asian Nations, still brisk.
“Asia has grappled in the last several years with the effects of overly aggressive monetary easing. With the transmission mechanism still well oiled, rate cuts and monetary expansion can quickly feed into asset price increases and, ultimately, a sharp rise in price pressures,” Neumann says.
He adds the way forward is through fiscal policy, and that a combination of regulatory reform and extra spending is required.
“Extra cash will help shore up demand in the coming months. This is true for most countries, including China. Across Asia, opening up new sectors to investment would provide a more lasting boost to investment confidence,” Neumann says.
Tai says China has been an important growth engine for Asian exporters in 2010-11, and its slowdown is having a material impact.
“Commodity exporters, such as Indonesia and Malaysia, are no longer seeing the high prices for their products enjoyed two years ago. This also capped growth for these economies,” he adds.
Tai expects regional growth to improve.
“There are few concrete signs at this stage, but I think the general expectation is that China will turn around by some stimulus to protect growth,” he says.
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