Asia leads world growth -Trade and output surge in 4Q10 :Macquarie Research,

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Asia leads world growth
Trade and output surge in 4Q10
Event
 New data shows global trade and industrial production growth reaccelerated
in 4Q10, led by activity in Asia. Output in the region is now 28% above pre-
Lehman peak while elsewhere it is still 7% lower. By implication, the policy
challenge for Asia – how to slow growth towards trend in order to limit inflation
overshoot – is different from elsewhere.

Impact
 The latest World Trade Monitor confirms the surge in world trade and
production towards the end of CY10 already seen in the disaggregated
releases from individual countries. Trade matched the 1.8% MoM gain seen in
November, giving 10.8% QoQ annualised growth in 4Q10 and marking a clear
pick-up from the soft patch that began in 2Q10. Industrial production rose
7.4% in 4Q10, also accelerating away from a sluggish period.
 Asia has led the rebound, with growth in trade and output of 29.2% and 16.4%
respectively in 4Q10. For the rest of the world the gains were 3.6% and 2.7%.
Analysis
 Compared to the rest of the world, the performance of regional trade and
output over the past two years is remarkable, as shown in the charts on the
left. This reflects the aggressive and effective fiscal and monetary stimulus in
response to the global financial crisis, as well as the underlying structural
demand growth across the region.
 Moreover, the third chart on the left shows that this has not been an exportled
recovery. Imports have been rising slightly faster than exports since the
trough in 1Q09. Considering the differential in the output growth rate
compared with the rest of the world, it is surprising that Asian import growth
has not been significantly stronger than exports, and this is a probable
indication of undervalued exchange rates.
 PMIs and trade data from individual countries around the region suggest that
the acceleration in growth has continued into CY11. This presents an
inflationary risk heading into the third year of cyclical recovery, when real
interest rates are low and commodity prices are rising. So far policy-makers
have shown an impressive degree of prudence in tightening fiscal and
monetary policy relatively early in the cycle, and the pick-up in underlying
inflation has been quite modest. However, the growth acceleration means
more intense pressure for policy tightening in an attempt to slow growth
towards trend.