International | Nov 07 2013
– Asian growth forecasts revised upward
– Exports to Europe recovering
– Fed policy remains a danger
By Greg Peel
Chinese hard landing fears will probably never go away as long as questions surround the property development bubble and high levels of local government debt. But for as long as the nervous have called wolf, Beijing has tweaked its policies and pulled China through without economic shocks. With the financial and fiscal reforms initiated earlier in the year now bedded down, China’s GDP growth rate has stabilised. Indeed, whereas six months ago economists were predicting 2013 growth of around 7%, those forecasts have since ticked up into the 7.5-8% range.
Forecasts for the “Asia-10” (China, Hong Kong, Taiwan, Korea, Vietnam, Thailand, Singapore, Malaysia, Indonesia and the Philippines) have also been revised upward. DBS Group, for one, is forecasting 6.0% growth in 2013 and 6.4% in FY14.
China’s economic indicators in the form of purchasing managers’ indices (PMI) have, as DBS notes, ticked up in the past two months. The manufacturing sector PMI for October came in at 51.4 and the service sector PMI at 56.3, both thus indicating expansion (>50). While much attention is paid to the former sector, DBS points out growth in the latter renders it presently more important. Services in 2013 are running at 45% of GDP compared to 2012’s 38%.
The good news behind these numbers, and the recent 7.8% GDP reading, is that exports to Europe are no longer falling, DBS notes. As Europe wallowed in the mire in 2012, exports from China fell by US$99bn or 0.75 percentage points of GDP. Exports from the whole Asia-10 have stabilised and may even show some growth by year-end, but even a flat result from here should add 0.5pps to the region’s 2013 GDP, DBS points out.
The bad news is that exports to the US have slowed. Further slowing could negate the recovery in Europe, DBS laments.
ANZ economists note that economic expansions are generally characterised by two aspects – speed and breadth. While Asia’s current rate of output expansion is not suggesting a return to the sort of accelerating pace of pre-GFC years, the breadth of expansion appears to be increasing and this is a positive sign for the durability of the expansion, ANZ points out.
Inflation drivers in the region are becoming more localised, ANZ suggests, with local policies (such as reductions in food and petrol subsidies in among some of the Asia-10) and local food supply dynamics now more influential than external macro factors. Local Asian central banks will thus likely tighten monetary policy at different speeds through 2014, while India’s tightening cycle appears to be nearing its peak, ANZ suggests.
Hanging over Asia, and the smaller economies in particular, is the threat of US Federal Reserve policy changes. When the Fed dropped the first QE tapering hint in May, foreign capital immediately rushed out of Asia and Asian currencies tanked. With QE3 in place, US investors saw Asia as a potential high growth reward on a low risk of low interest rates, but if QE is set to be wound down, the attraction wanes. September saw the Fed not deciding to taper, and the US shutdown has pushed consensus expectations out to March. As a result, Asian currencies and stock markets have posted recoveries.
With the US dollar remaining weak on postponed tapering expectations, CIMB Securities suggests the path of least resistance for Asian markets remains up through to year-end, helped along by easy liquidity conditions and seasonal factors. CIMB nevertheless suggests short term volatile upside should be seen by investors as a chance to trim positions, given the tapering debate will come around again sometime in the first half of 2014.
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