Australia | Mar 26 2013
By Andrew Nelson
The focus has started to shift from Asia to the US as the hoped for driver of economic momentum, but Asia is by no means dead yet. Economists from Denmark’s Danske Bank point out that not only is growth from Asia still expected, but it should also improve in the quarters ahead.
Let’s not jump to overly optimistic conclusions, warns Danske. While a moderate recovery in China and a strong rebound in Japan are certainly expected, the bank’s expectations for 2014 look a little more challenging.
Danske fully expects the recent resurgence in Japan will taper off into next year on the back of what has been substantial fiscal tightening. There are also more question marks with China, the bank noting the ultimate pace of the deceleration in China’s long-term growth rate is still a great unknown.
Recent data from China seem to indicate that what was starting to look like a steady recovery actually began to falter over the first quarter of this year. It’s far from dire news just yet, Danske reporting that leading indicators such as money supply and credit growth are still strong, so there is still some acceleration left.
Getting a tight read on China’s economic direction over the first few months of any year is always difficult given the disruption caused by the nation’s New Year holidays. Still, the slowdown that is evident from the last quarter of 2012 is enough for the broker to revise its GDP forecast for 2013 down to 8.4% from 8.6%.
What seems to have become clear to the bank is that the impact from last year’s fiscal stimulus is starting to wear off and with the People’s Bank of China now seen to be gradually moving to a tighter footing, a rate hike in the last quarter of 2013 is a little more than merely possible.
There have admittedly been some solid signs of improvement in investment demand, but Danske notes this has really been driven by healthy infrastructure spending. Otherwise, housing construction, up until quite recently, has remained subdued. The bank sees this picture reversing, noting signs that infrastructure spending may have peaked, while housing is finally starting to respond to the strong house sales data that have been posted since the middle of 2012.
So with money supply growth steady, credit growth being supported and cyclical investment demand seeming to have remained relatively firm, China should be able to progress with a steady, if moderate, recovery, thinks Danske.
While China can be described as a slow burn, or a fire that doesn’t show much sign but grows increasingly hotter, Japan could best be described as a flash fire: violent, fast, bright and then gone. The new government under Prime Minister Shinzo Abe has outlined an aggressive focus on growth, which is readily expected to ignite a strong recovery over the next few months, with GDP growth exceeding 3%.
After the burn, in 2014, Danske expects the Japanese economy will be staring down the barrel of some significant resistance from both the fiscal tightening that will be needed and a slow but steady unwinding of the reconstruction boom post the 2011 earthquake. In fact, Danske thinks Japan could be at the brink of recession again over 2014. That is, of course, if the economy can’t find any support from a weaker yen and a global recovery, which is admittedly possible.
In the meantime, there is only the life support being provided by what is very accommodative monetary policy. And with no imaginable end to current woes in sight, Danske expects it will be a long time before Japan challenges even its new 2% inflation target, meaning asset purchases will remain aggressive next year.
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