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Asia growth clip picking up in 2013
By Glenn Levine |
February 18, 2013, Monday
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ASIA'S economies opened 2013 on an even keel, with risks receding and growth heading back towards its trend pace. Europe and the US have begun to stabilize, domestic risk remains contained, and policy settings are generally favorable. Fourth quarter data showed improvement from the previous period, and we expect this to continue through 2013 as demand steadily improves.
Most Asian economies will be growing at their potential rates by the end of 2013. Interest rate hikes will come into view around this time.
The biggest improvements have been external. US data have turned up, with private sector hiring more solid and the housing market healing, and should continue on that path as uncertainty around Washington's fiscal situation starts to clear. Europe also appears to be muddling through. The euro zone is far from healthy and its sovereign debt problems still pose the biggest downside risk to the global economy, but the situation looks better than at any point since the crisis began.
A better external environment lifts Asian financial markets and business confidence and, longer term, will translate into faster local and foreign investment. Asia's economies rely heavily on exports, and an improved export manufacturing cycle lifted the region through the December quarter.
South Korea, an export-driven economy, provide a good gauge for the region. The country ships a range of goods, including autos, electronics and ships, to a large number of global markets. Initial signs suggest the first quarter of 2013 will be a little better than the previous quarter, although still below potential.
The region's Purchasing Managers Indices show a steady uptrend, with around half of the countries posting readings above 50, indicating near-term expansion.
Other leading indicators mirror this trend. The Organization for Economic Cooperation and Development's composite leading indicator for Japan showed a mild improvement in October (the latest available month), the first increase since March, while South Korea now trends solidly upwards. China's PMI readings are rising at an accelerating rate, suggesting continued improvement. Chinese manufacturing lifts the rest of Asia, both directly and indirectly, as a gauge of global manufacturing demand.
Stimulus helps
Asian governments and central banks loosened policy in 2012 as external conditions deteriorated. Interest rates were cut in Australia, China, India, Indonesia, South Korea, the Philippines and Thailand. The Reserve Bank of Australia was among the most proactive, cutting rates six times since October 2011. The Aussie housing market has now stabilized and should trend sideways rather than down in coming quarters. Lending cooled in China in the latter months of 2012, but remains elevated.
Asia's governments enjoy low debt burdens, giving them some scope for fiscal stimulus. South Korea's government offered expanded car and housing subsidies, while China brought forward spending on utilities and other infrastructure in the second half of 2012.
China's new leaders aim for steady Gross Domestic Product growth, while clamping down on corruption. Other official goals include curbing pollution and, longer term, rebalancing the economy towards consumption. These targets and what the government calls "better quality growth" will cap China's potential GDP growth in 2013 at 8 percent, a rate that will fall to 7 percent by 2016.
Austerity has taken hold in Australia for political reasons and in India to mitigate fiscal risk. Tight fiscal policy has curbed growth in Australia, but in India, it is part of Prime Minister Manmohan Singh's revamped economic stance. With a new finance minister and a new coalition arrangement, Singh has successfully implemented reforms to lower India's fiscal and current account deficits.
This has helped to mitigate near-term risk and lift business confidence, which should translate into better investment and headline growth beginning in the second half of 2013. We see India's GDP growing 6.2 percent in 2013 before returning to around 7.2 percent in 2014.
The region's most dramatic economic story is unfolding in Japan, where the newly elected government has moved to end two decades of stagnation and perhaps, in a best-case scenario, to achieve fiscal sustainability. Coordinated fiscal and monetary policies, including open-ended quantitative easing and a doubling of the Bank of Japan's inflation target to 2 percent, have already lifted financial markets and brightened the outlook for the real economy.
Japan's recovery
These long-overdue developments have prompted an increase in our forecast for Japan's GDP growth to 1 percent this year and 1.8 percent in 2014. The inflation forecast has been lifted to 0.3 percent in 2013 and 1.3 percent in 2014, still below the BoJ's revised target, as we expect entrenched expectations to cap price growth. The central bank's revised estimates see CPI inflation under the 2 percent target until the fiscal year ending in March 2015.
The BoJ's latest moves bring some added risk. Japan's fiscal situation is unsustainable. If bond investors start to price in higher inflation, yields could rise and the government's debt burden could quickly become unsustainable.
The yen's recent decline, coupled with weak global growth, has agitated global central bankers and policymakers, prompting talk of a currency war.
Central bankers will likely continue to practice quantitative easing to weaken their respective currencies, possibly alongside capital controls. Thailand and South Korea are most likely to take such action. This will not be a significant problem unless it spills over into trade restrictions, which would hurt global growth. Trade-dependent Asia would suffer under this scenario.
Glenn Levine is a senior economist with Moody's Analytics. The opinions are his own.
Most Asian economies will be growing at their potential rates by the end of 2013. Interest rate hikes will come into view around this time.
The biggest improvements have been external. US data have turned up, with private sector hiring more solid and the housing market healing, and should continue on that path as uncertainty around Washington's fiscal situation starts to clear. Europe also appears to be muddling through. The euro zone is far from healthy and its sovereign debt problems still pose the biggest downside risk to the global economy, but the situation looks better than at any point since the crisis began.
A better external environment lifts Asian financial markets and business confidence and, longer term, will translate into faster local and foreign investment. Asia's economies rely heavily on exports, and an improved export manufacturing cycle lifted the region through the December quarter.
South Korea, an export-driven economy, provide a good gauge for the region. The country ships a range of goods, including autos, electronics and ships, to a large number of global markets. Initial signs suggest the first quarter of 2013 will be a little better than the previous quarter, although still below potential.
The region's Purchasing Managers Indices show a steady uptrend, with around half of the countries posting readings above 50, indicating near-term expansion.
Other leading indicators mirror this trend. The Organization for Economic Cooperation and Development's composite leading indicator for Japan showed a mild improvement in October (the latest available month), the first increase since March, while South Korea now trends solidly upwards. China's PMI readings are rising at an accelerating rate, suggesting continued improvement. Chinese manufacturing lifts the rest of Asia, both directly and indirectly, as a gauge of global manufacturing demand.
Stimulus helps
Asian governments and central banks loosened policy in 2012 as external conditions deteriorated. Interest rates were cut in Australia, China, India, Indonesia, South Korea, the Philippines and Thailand. The Reserve Bank of Australia was among the most proactive, cutting rates six times since October 2011. The Aussie housing market has now stabilized and should trend sideways rather than down in coming quarters. Lending cooled in China in the latter months of 2012, but remains elevated.
Asia's governments enjoy low debt burdens, giving them some scope for fiscal stimulus. South Korea's government offered expanded car and housing subsidies, while China brought forward spending on utilities and other infrastructure in the second half of 2012.
China's new leaders aim for steady Gross Domestic Product growth, while clamping down on corruption. Other official goals include curbing pollution and, longer term, rebalancing the economy towards consumption. These targets and what the government calls "better quality growth" will cap China's potential GDP growth in 2013 at 8 percent, a rate that will fall to 7 percent by 2016.
Austerity has taken hold in Australia for political reasons and in India to mitigate fiscal risk. Tight fiscal policy has curbed growth in Australia, but in India, it is part of Prime Minister Manmohan Singh's revamped economic stance. With a new finance minister and a new coalition arrangement, Singh has successfully implemented reforms to lower India's fiscal and current account deficits.
This has helped to mitigate near-term risk and lift business confidence, which should translate into better investment and headline growth beginning in the second half of 2013. We see India's GDP growing 6.2 percent in 2013 before returning to around 7.2 percent in 2014.
The region's most dramatic economic story is unfolding in Japan, where the newly elected government has moved to end two decades of stagnation and perhaps, in a best-case scenario, to achieve fiscal sustainability. Coordinated fiscal and monetary policies, including open-ended quantitative easing and a doubling of the Bank of Japan's inflation target to 2 percent, have already lifted financial markets and brightened the outlook for the real economy.
Japan's recovery
These long-overdue developments have prompted an increase in our forecast for Japan's GDP growth to 1 percent this year and 1.8 percent in 2014. The inflation forecast has been lifted to 0.3 percent in 2013 and 1.3 percent in 2014, still below the BoJ's revised target, as we expect entrenched expectations to cap price growth. The central bank's revised estimates see CPI inflation under the 2 percent target until the fiscal year ending in March 2015.
The BoJ's latest moves bring some added risk. Japan's fiscal situation is unsustainable. If bond investors start to price in higher inflation, yields could rise and the government's debt burden could quickly become unsustainable.
The yen's recent decline, coupled with weak global growth, has agitated global central bankers and policymakers, prompting talk of a currency war.
Central bankers will likely continue to practice quantitative easing to weaken their respective currencies, possibly alongside capital controls. Thailand and South Korea are most likely to take such action. This will not be a significant problem unless it spills over into trade restrictions, which would hurt global growth. Trade-dependent Asia would suffer under this scenario.
Glenn Levine is a senior economist with Moody's Analytics. The opinions are his own.
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