International | Jun 15 2009
By Chris Shaw
As DBS Group points out, it was only recently market commentators were forecasting the worst global recession in 50 years and suggesting Asia in particular would be hard hit, but recent economic data suggests neither of these outcomes are now likely to occur.
As examples the group notes industrial production in Japan rose 5.5% month on month in seasonally adjusted terms between March and April, its biggest gain in 55 years, while in the same month the same measure recorded its second highest ever gain in Taiwan.
With Korea and Singapore also recording some better economic measures in recent months, the Asian economic recovery appears to be taking on a “V” shape, especially given the data shows the pace of the upswing has been faster than the downturn given in the past three months Asia has recovered 85% of the ground it lost in the six months prior.
In the group’s view this is likely to be sustainable as the
issues causing the downturn such as commodity price swings, the passing of the Olympic Games and the shock of the financial sector meltdown in the US and elsewhere were temporary in nature.
This means another down leg in the recovery process is unlikely and means growth should more or less resume as normal, especially as the data shows the Asian recovery is occuring even though the US is much further behind in terms of economic improvement, meaning the Asian region doesn’t need to wait for the US to recover for growth to resume.
Taking a view of the next five years, the group expects growth is more likely to be above average than below, especially for those nations with strong trade links to China. As proof of this the group points out when the global economy was at its weakest, exports to China fell by
around 50%, while those to the US fell by 21%.
Since January of this year however, exports to China have subsequently recovered by a little more than 30% while those to the US continue to decline, the data also showing China has not simply been a middle man for Asian exports to the US, but is the region’s major driver and with its economic indicators turning up the region as a whole will benefit.
There are a number of reasons why the group sees Asian growth as likely to be faster in the next five years than the previous five, one being structural change in that the region is contributing more to global incremental demand growth than has historically been the case. This trend is likely to continue.
When the world realises demand is being generated in Asia, investment will follow in the group’s view, especially as the alternatives such as investing in the US are likely to offer lower rates of return.
According to DBS this means a return to a high growth decade such as the one that ended a decade ago, with high rates of domestic capital formation, current account deficits and above average GDP growth.
For China the group suggests 7.5% GDP growth year-on-year is easily achievable, especially as data such as the purchasing manufacturer’s index and industrial sales are increasing. Consumption is unlikely to be the primary driver of growth as further work needs be done to encourage spending, rather DBS expects it will be government spending and its aggressive lending policy that drives the economy in the shorter-term.
In contrast the Hong Kong economy continues to suffer the lagged effect of the financial crisis and so is expected to see GDP contract this year, but growth should gradually recover, helped by improving asset prices and the boost this provides to sentiment generally.
For Taiwan and Korea, DBS says exports will lead the recovery, particularly as relations with China continue to normalise. Add in good liquidity and accomodative monetary policy from the central bank and the group expects GDP growth in the former in year-on-year terms to again be positive by the fourth quarter of this year, while in Korea growth has already turned positive.
With respect to India, the group sees the economy re-accelerating and a return of capital flows and this supports expectations of positive growth of around 6.5% in coming quarters, though the scope for the new government to introduce new policies means there are both upside and
downside risks to this figure.
Indonesia should also record positive growth this year given its economy remains domestically focused and the government is expected to continue to spend to support the economy in the group’s view. While higher oil prices pose some risk DBS doesn’t see the price as high enough at present to be of major concern.
With its economy so focused on exports the rest of 2009 should be tough for Malaysia in the group’s view, but a modest recovery is expected in 2010, especially as there are early signs of an improvement in industrial output. Policy decisions will also be important to the speed of the nation’s recovery according to DBS.
While growth in Thailand should remain positive the group suggests political uncertainty will keep a lid on activity levels to some extent, meaning while GDP growth should be positive at around 3% in coming periods it will remain below potential of around 5% annually.
Singapore is another region to show some signs of improvement with respect to economic data after a very weak first quarter of this year and the group expects this will continue, its forecasts calling for negative growth this year of around 6% before a return to positive growth of around 4% in 2010 as exports recover.
The level of remittances remains the key for the Philippines economy in the group’s view as they have fallen in recent months given the global downturn and this has flowed through to lower levels of consumer spending. With additional government stimulus likely, the group sees growth recovering modestly over the course of this year.
While the data has stabilised and in some cases improved in Japan the group remains cautious on its outlook as the upturn in external demand to date has been modest and this is causing firms to hold back on investment plans. deflation also remains a risk and this leads the group to suggest while growth in 2010 should be positive it will remain
at sub-optimal levels.