International | Sep 10 2008
By Chris Shaw
Rather than the potential for weaker commodity prices to impact on growth in the Asian region, Barclays Capital suggests investors should focus on strong money growth and inflation, as it sees these as the key risks for economies in the sector.
It is likely Asian currencies will continue to weaken against the US dollar over the next quarter or two, in the group’s view, with the currencies of India, Korea, Thailand and Taiwan seen as most vulnerable to further falls. Such an outcome leads Barclays to suggest a general slowing of economic growth in the area, with growth rates expected to return to trend levels in the December half.
While a soft landing is the group’s forecast, it sees downside risks in Korea, Taiwan and Singapore, with the slowdown in the latter centred on electronics and pharmaceutical exports, but more broad-based slowdowns expected in both Korea and Taiwan.
Looking back over data, Barclays notes a strong positive correlation between M2 and GDP growth throughout the region, which indicates the strong growth has been at least partly due to loose monetary conditions in recent years. This suggests that with monetary conditions not yet tight in either India, Indonesia or China, these economies should deliver at least trend growth for the next couple of quarters.
Also supportive to the group’s outlook is the fact real export growth has continued at stronger than expected levels given the slowdown in the G3 economies and Barclays cannot see any sort of crash in this area in coming months, as now more than 40% of the region’s exports are linked to inter-regional trade. Having said that, Barclays expects Singapore and Taiwan will find the going a little tougher than most other countries in the region, while Korea and the Philippines may also experience less favourable conditions.
According to the group, the problem if growth slows to trend levels is the potential for inflation to remain an issue for some time given it tends to lag its inputs. As an example, the group points out that while oil prices are moving lower at present, the fact they have been high is likely to only flow through to an impact on consumer spending in the first quarter of 2009.
But the big issue in the group’s view is the fact that with monetary conditions still accommodative, if growth slows to trend, the output gap should still be positive and when this is combined with monetary growth, it is likely to result in a continuation of inflationary pressures.
While hikes in reserve requirements in China, India and Indonesia in coming months are expected in attempts to counter this, elsewhere in the region concerns over the rate of economic growth should mean interest rates are already close to cyclical peaks and so are unlikely to go much further.
This means the US dollar could strengthen further against currencies in the region, as Barclays sees inflation concerns as a negative for the Asian currencies given the scope for downward revisions to corporate earnings and potential increases in net capital outflows.