International | Mar 16 2010
By Chris Shaw
In the view of Danske Bank the recovery in the Asian economies increasingly appears to be sustainable, as growth is now more broadly based and growth momentum is currently strongest outside the majors of China and Japan.
The growth outlook is supported by improving export numbers, with data for both January and February strong across the region. Danske Bank also notes manufacturing PMI (purchasing manager's index) data outside China and Japan have improved significantly in recent months.
This means for Asia ex-Japan GDP growth has been better than Danske Bank had forecast, a trend it sees continuing through the first quarter of 2010. But with OECD leading indicators suggesting export growth will likely peak in this period, growth could slow in coming quarters. This is especially the case given the output gap appears to be closing quickly.
Given the possible peak in exports, Danske Bank suggests stronger domestic demand is required for the Asian economic recovery to be self-sustaining and for this it sees three necessary conditions.
The first is a turnaround in the labour market to a state of growing employment, which appears to have been met given recent data suggest overall unemployment in Asia peaked in the September quarter of 2009.
The second condition is a turnaround in the housing market and again there is encouraging evidence of this in Danske Bank's view. While property prices throughout the region declined as a result of the global financial crisis, they have since rebounded sharply, which Danske expects will boost both private consumption and residential investments throughout the region.
The final necessary condition is a recovery in manufacturing investment and again the news here is improving. Danske Bank notes investment in machinery has surged recently. Korea is one example as investment in machinery and equipment is currently up by more than 30% from its lows last year.
As the output gap closes and as growth has been strong inflationary pressures are now emerging throughout the region, with the exception of Japan. This means real interest rates are now at negative levels, leading Danske Bank to forecast central banks will start lifting rates in the second or third quarter of this year.
The Bank of Japan is likely to be the odd one out, ongoing deflationary pressures in that economy enough for Danske Bank to suggest a further easing in policy via the provision of additional liquidity at longer maturities in money markets.
Japan's growth struggles are in stark contrast to China, where growth remains strong and concerns remain with respect to the economy overheating and a possible asset bubble forming in the property market.
While both threats are real, Danske Bank doesn't see growth as a major issue, even as some stimulus measures are unwound. It also sees little real evidence of a bubble in China's property or financial markets as while debt levels are higher, they remain well below those experienced by the likes of Spain and Ireland in recent years.
In terms of actual forecasts, Danske Bank expects GDP growth in Asia of 6.9% this year and 6.8% in 2011, which includes expected growth in China in both years of 9.5%. For Japan it is forecasting GDP growth of 2.7% this year and 2.1% in 2011.
