First the IMF warned developing Asia to brace for shocks from the West. Then the Asian Development Bank slashed its regional growth forecasts. Now analysts are asking, has Asia lost its mojo?
The European debt crisis and weakness in the United States have long been drags on Asian growth, but throw in China’s difficult leadership transition and the outlook is grim.
“It wasn’t supposed to turn out like this. Growth in recent months has faltered again, confounding expectations of a gradual recovery,” HSBC economists Qu Hongbin and Frederic Neumann wrote in a report released last week.
“China is one culprit, though a wobbly West is equally to blame.”
As Asia’s powerhouses China and India slow faster than many had expected, the ADB last Wednesday revised down its growth estimates for the region’s emerging economies to the lowest level since 2009.
Echoing assessments from the International Monetary Fund, the bank also warned of significant risks arising from the euro zone and the uncertain recovery in America, both of which are major export markets for Asian manufacturers.
“Developing Asia is slowing down much more than we expected,” ADB chief economist Changyong Rhee told reporters in Hong Kong.
“The years of two-digit growth in Asia are coming to an end.”
The bank cut its this year growth forecast for developing Asia, which comprises 45 nations, from 6.9 per cent in April to 6.1 per cent – the lowest since 2009 when the region expanded 6.0 per cent.
It also revised downward the 7.3 per cent growth outlook for next year to 6.7 per cent. The region expanded 7.2 per cent last year.
China’s gross domestic product (GDP) was seen expanding 7.7 per cent this year – slow by the country’s recent standards – before bouncing back to 8.1 per cent next year, still well below the 9.3 per cent achieved last year.
The Manila-based lender said India would see GDP growth slow to 5.6 per cent this year before picking up to 6.7 per cent next year.
Analysts are wondering when will China crack the whip and provide the policy stimulus its economy needs to avoid a hard landing. HSBC economists Qu and Neumann said they had expected Beijing to act sooner.
“China has held back in providing a determined stimulus, with obvious implications for economic growth regionally,” the economists wrote.
Domestic politics may be one reason Beijing seems unwilling or unable to use its fiscal reserves to boost growth, with the Communist Party leadership on the verge of a once-a-decade power shift that has been clouded by controversy.
“Given that growth is highly investment driven, supported especially by the public sector, any leadership change is bound to have a large impact on activity,” Qu and Neumann said.
“This year, more so than during other transitions, political uncertainty may have had an especially restraining effect on investment decisions.”
Asia’s worsening outlook is likely to be underlined when the IMF provides an update on the global economy in a twice-yearly report on Tuesday, in the run-up to weekend meetings of finance ministers from around the world in Tokyo.
But is it time to hit the panic buttons? Has Asia really lost its economic vim? Some analysts say no.
“Asia hasn’t quite lost its mojo yet, but patience is needed before growth accelerates to more accustomed speed,” Qu and Neumann said, predicting China would loosen policy early next year when the new leadership is in place.
Rhee agreed that there is no need for panic.
“This is a natural adjustment to a more sustainable growth pace,” he said of the outlook for developing Asia.
Of all the regions in the world that are struggling to cope with the fallout from Europe and the United States, Asia has the most ammunition in its policy armoury to respond, research consultancy Capital Economics said on Friday.
“Asia has significant scope to loosen both monetary and fiscal policy,” it said.
“Unlike in most of the developed world, interest rates are well above zero across Asia, meaning there is room for interest rates to be cut in most countries.”
ANZ bank said in an analysis last week that while growth in China and India was on the slide, the core economies of Southeast Asia were proving remarkably resilient.
It noted that while the rest of Asia had “re-linked” with the West – with domestic demand tracking weak external demand for exports – this was not the case in Southeast Asia’s biggest developing economies.
“This has broken down entirely in Asean [Association of Southeast Asian Nations] over the past few quarters with domestic demand and foreign demand now largely uncorrelated,” the ANZ report said.
This meant that Asian economies such as Indonesia, Malaysia, Thailand and Vietnam would “likely hold up well” if the global economy slowed further.