International | Dec 12 2008
By Chris Shaw
As evidence of the impact the world’s worsening economic conditions are having on Asian growth, DBS Group now expects 2009 GDP growth of just 3% in the region. The new numbers are in sharp contrast to the group’s forecast of 6% just three months ago and well below the 7% growth the region achieved in 2007.
But the outlook is not all bad in the group’s view, as it points out the market is currently focussing on the October and November data releases. These are likely to represent the most significant falls, as they follow on from the September and October meltdown in financial conditions. Extrapolating this data forward would give an inaccurate picture in the group’s view, as conditions can change very quickly. Even assuming growth slowed to 3.0% as it now expects means the magnitude of the slowdown still wouldn’t be as great as the downturn of 2000/01 and would in fact be 25% less of a fall.
There are a couple of reasons for this, in the group’s view, firstly the downturn at the beginning of the decade was the result of the end of the IT and dotcom boom, which had direct implications for high tech industries in the Asian region. This time around the impact began in the US housing sector and has gradually spread to other areas of the market, meaning it has been a far more roundabout process and so the impact on Asian economies has not been as sharp.
The other reason is Asia now is bigger and more dynamic than it was back then. A decade ago Asia had no domestic demand growth and relied almost entirely on exports, whereas this time around a number of economies in the region are big enough to drive their own growth given the region generates almost as much new demand every year as does the US economy.
With this in mind, DBS expects Asia will emerge from the downturn faster than the US, as it is cyclically better positioned and because the region drives its own growth much more than before. Such an outcome would replicate the 2000/01 downturn and subsequent recovery, as the group notes while Asian and US manufacturing both fell heavily, by the time the US had recovered to its pre-downturn levels Asian manufacturing had already risen to 20% above that mark.
In terms of how the global downturn may play out, the group suggests there is a chance the US downturn may not be its worst since World War II. The team reasons that while the December quarter numbers will be terrible, they are unlikely to be repeated and March quarter 2009 numbers are unlikely to be as bad as those of the current quarter.
Supportive to this view is the fact core consumption is never very cyclical. The group points out this means while consumption is falling at present in the US, there is a limit to how far it can go, as essentials still have to be bought. These make up almost 90% of all consumption anyway. This suggests the extent of the recession will be limited.
One other positive is that, in the group’s view, the banks are not nearly as important to the economy as was previously the case. This means while the banking sector issues in the US and elsewhere are a problem, they are not the big problem they would have been if these issues had occurred in the 1980s for example.
Credit activity is also not the factor it appears to be, in the group’s view, as its analysis of the data suggest commercial credit activity continue to grow and consumer loans are also increasing. This means credit is available for those needing it and with enough security to get it.
Losses from the meltdown may also not be what they appear, as while derivatives and fancy products with titles such as CDOs and CDSs are blamed, the group makes the point they are a zero sum game. This means while some are recording huge losses, someone, somewhere must be recording huge profits. It also suggests the actual magnitude of the losses from the financial crisis are small in terms of the overall economy.
This all relates more directly to the US economy, but what does it mean for Asia? As previously suggested, DBS doesn’t see the Asian economy as being hit as hard this time around and it will emerge from the crisis first. As to the various economies in Asia, the group expects the stimulus being provided in China and the potential for further such actions will prevent growth from falling too far, with its expectations suggesting 8% growth in 2009 is achievable.
In contrast, the Hong Kong economy is likely to decline slightly in 2004, with risk to the downside depending on how the global economy performs. Taiwan is also likely to slide into recession, but with liquidity levels remaining good and with structural reforms being implemented, the group doesn’t expect any recession will be a deep one.
A slowing in domestic demand will impact on the Korean economy, but with oil prices down and the government still having some room for policy stimulus, the group expects a modest recovery in growth in the second half of 2009. Growth in India is expected to fall to around 6.5% from 9% previously, but DBS suggests further reforms are necessary to deliver growth in a range of 8-10%.
The slowdown in Indonesia will be offset by both fiscal and monetary policy initiatives, but DBS sees growth slowing to around 4.8% in 2009 from a little over 6% this year. Malaysia should experience a growth slowdown of a similar magnitude as domestic demand slows, in the group’s view .
In Thailand, the downturn should be relatively short-lived, in the group’s view, as it expects signs of a recovery in the second and third quarters before growth picks up more strongly in the fourth quarter of 2009. The news is not as good for Singapore given DBS expects a contraction in growth throughout next year, as all key sectors of the economy are currently struggling.
Cuts to interest rates should provide some support for the Philippines economy, but it will also slow down in coming quarters. The export dependence of the Vietnamese economy means it too will record slower growth in 2009 than in 2008, on the group’s numbers.
In terms of currency markets, the group sees the US dollar as struggling to hold onto its gains of this year, as they were based on deleveraging rather than fundamentals. Supporting this view is the group’s estimate the US growth outlook will largely match that of the EU and Japan in 2009, while debt monetisation next year will also be a drag on the greenback. As well, the euro is seen as likely to consolidate rather than fall further, in part because further falls in the currency against the US dollar and the yen would destabilise Eastern European economies and in part because rates in the EU remain relatively high.
Similarly Japan is concerned its strong yen is worsening its competitive position against its major trade rivals in Asia. DBS suggests once the worst is seen to be over in terms of the financial crisis, the market’s attention will return to the yen being seen as a low yielding currency with weak fundamentals. As well, there remains a risk Japanese authorities may intervene to prevent the currency from rising further.
Elsewhere, the group sees no strong case for either appreciation or depreciation of the Chinese currency, at least until the global economy begins to show signs of recovery. This is expected in the second half of 2009 and should be followed by further currency appreciation in the group’s view.
For equities in the region, the group expects a wide trading range for the next couple of quarters. It notes while a bottom seems near given the amount of stimulus being provided by authorities, it will take some time to restore conditions and confidence levels.
While there are likely to be more short than long trades early in 2009, and the group suggests avoiding asset plays and cyclical sectors during this time, there will at some point be a switch to recovery trades. DBS sees the more attractive markets as those with flexibility in both fiscal and monetary policy, which suggests the Singapore, Hong Kong and Chinese markets.
The group retains its Neutral weighting on the Korean equity market at present, but has downgraded Thailand and Taiwan to Underweight. In both cases the group sees few options for policy makers to deliver some improvement in the current economic environment.