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India Equity Research Reports, IPO and Stock News
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Calming inflation fears
Slower growth in CY11
This report contains detailed forecasts for the economies that we cover across
Asia, and the latter section sets out the prospects for individual economies. In
most cases, we think growth should slow significantly in CY11–12 after the postcrisis
rebound of 2009–10, but that it will need continued policy tightening to limit
inflation risks, with commodity prices adding to uncertainty.
So far this year, growth has generally been performing in line with our
expectations, with the obvious exception of Japan. However, our inflation
forecasts have risen, implicitly due to events outside of the region – mainly as a
result of commodity price movements.
Inflation is the focus
Our view that underlying inflation risks are not particularly severe – bearing in
mind this is the third year of recovery – has received support over the past
month, from both evidence of continued prudence from policy-makers and signs
that the recent burst of activity is beginning to slow.
Policy-makers showing reasonable prudence
Interest rate hikes have combined with exchange rate appreciation to lead to
tighter monetary conditions across most economies in the region. At the same
time, the pace of increase in foreign exchange reserves points to fundamental
upward pressure on exchange rates – coming from an undervalued position –
which, in turn, points to the potential for further currency appreciation, as
discussed a month ago.
China is an important part of the picture, and we are increasingly comfortable
with the idea that policy-makers are ahead of the curve. Credit tightening is
biting, which points to slower growth and a peak in inflation by the end of 2Q11.
And growth is starting to slow
There are also signs that the late CY10 rise in industrial production, driven by the
tech sector, is beginning to slow. This seemed to have been a short-term
reaction to a sluggish period in mid-CY10 rather than a reflection of a
fundamental acceleration in demand, so a slowdown is just growth reverting
towards trend.
The supply chain impact from the Tohoku earthquake seems likely to cause
short-term disruption in some areas, mostly in April and May. There is a risk that
slower underlying growth across the region is wrongly ascribed to the impact
from Japan, rather than being recognised as a more genuine shift.
Underlying inflation remains moderate
Moreover, core inflation remains the dog that is refusing to bark across the
region. This suggests a flaw in the basic idea that prices will rise because
capacity is tight and policy is loose. We have doubts about all three of the
components of the argument.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Calming inflation fears
Slower growth in CY11
This report contains detailed forecasts for the economies that we cover across
Asia, and the latter section sets out the prospects for individual economies. In
most cases, we think growth should slow significantly in CY11–12 after the postcrisis
rebound of 2009–10, but that it will need continued policy tightening to limit
inflation risks, with commodity prices adding to uncertainty.
So far this year, growth has generally been performing in line with our
expectations, with the obvious exception of Japan. However, our inflation
forecasts have risen, implicitly due to events outside of the region – mainly as a
result of commodity price movements.
Inflation is the focus
Our view that underlying inflation risks are not particularly severe – bearing in
mind this is the third year of recovery – has received support over the past
month, from both evidence of continued prudence from policy-makers and signs
that the recent burst of activity is beginning to slow.
Policy-makers showing reasonable prudence
Interest rate hikes have combined with exchange rate appreciation to lead to
tighter monetary conditions across most economies in the region. At the same
time, the pace of increase in foreign exchange reserves points to fundamental
upward pressure on exchange rates – coming from an undervalued position –
which, in turn, points to the potential for further currency appreciation, as
discussed a month ago.
China is an important part of the picture, and we are increasingly comfortable
with the idea that policy-makers are ahead of the curve. Credit tightening is
biting, which points to slower growth and a peak in inflation by the end of 2Q11.
And growth is starting to slow
There are also signs that the late CY10 rise in industrial production, driven by the
tech sector, is beginning to slow. This seemed to have been a short-term
reaction to a sluggish period in mid-CY10 rather than a reflection of a
fundamental acceleration in demand, so a slowdown is just growth reverting
towards trend.
The supply chain impact from the Tohoku earthquake seems likely to cause
short-term disruption in some areas, mostly in April and May. There is a risk that
slower underlying growth across the region is wrongly ascribed to the impact
from Japan, rather than being recognised as a more genuine shift.
Underlying inflation remains moderate
Moreover, core inflation remains the dog that is refusing to bark across the
region. This suggests a flaw in the basic idea that prices will rise because
capacity is tight and policy is loose. We have doubts about all three of the
components of the argument.
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