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Asian Macqro forecasts
Growth surge set to fade
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.
Growth should slow significantly in CY11–12 after the post-crisis rebound of
2009–10, but it will need continued policy tightening to limit inflation risks.
Limited regional effects from Japanese disaster
The tragedy of the massive earthquake and tsunami that hit Japan might
produce a temporary hit to local production, but the economic impact across Asia
seems likely to be limited. Fiscal measures to provide emergency relief and
reconstruction might offset some of the damage to Japanese output from power
shortages. We would expect intervention to prevent disruptive foreign exchange
movements.
Burst in regional activity is set to fade
Aside from the issue of how events in Japan might affect the region, it seems
likely that growth is set to slow after the recent burst of activity. There is broad
evidence of an acceleration in regional trade and production in late CY10 that
extended into the new year. However, the reasons for this growth spurt are
important, as they help to gauge whether this implies a serious increase in the
inflationary risk for already tight economies (with obvious policy implications), or
whether it was a short-term adjustment that will fade in 2Q11.
Several factor point to a slowdown
Several factors suggest the growth surge will be a short-term phenomenon. First,
the late CY10 surge seems to be a reaction, in part, to a surprisingly sluggish
period of growth around 3Q10, which appears to be connected to the Chinese
policy cycle, which has since tightened.
Second, the bounce has been led by the technology sector, which seems more
likely to reflect a short-term inventory or product launch cycle than for a major
boost to output as a whole. Third, the emergence of China and the shifting timing
of the lunar new year holiday has made it increasingly difficult to perform a
reliable seasonal adjustment on data releases around the turn of the year.
However, improved growth prospects for Europe and the US, together with
sustained low real interest rates across most of Asia, suggests that any
slowdown in growth in unlikely to be particularly severe.
Growing concerns over the oil price
A further issue is the emerging risk of an oil price supply shock, coming at a time
when capacity is already tight due to the strong demand recovery of the past two
years. This would cut into profit margins and real incomes and so reduce growth
in the region and hurt exports to the developed world. We have recently raised
our oil price forecasts.
