Asian Economic Growth To Remain Soft In 2-H Of This Year
$DB, $HSBC
With the possibility of the Fed’s hiking interest rates later this year and domestic demand in most parts of Asia weak, analysts forecast that Asian economies are unlikely to generate strong growth in 2-H of Y 2015.
The strong economic data reported recently in the US raised expectation that easy money support may be coming to an end.
The asset markets in many parts of Asia are now experiencing uneasiness driven by fears of disorderly developments related to factors such as the Fed’s policy change.
Despite abundant liquidity and low cost of financing, regional consumption and investment momentum is still weak. Some economic weakness is understandable due to the sharp drop in commodity prices, but most Asian economies which rely on electronics, autos, and manufacturing input type exports, are also seeing chronically weak demand.
Based on Q-1 exports data reported by Asian countries, there is little sign of a turnaround in here, with exports dragging down economic growth well into Q-2.
According to Deutsche Bank Research (NYSE:DB), even if the US and EU demand was to improve in the second half of the year, the impact on regional exports may be modest. The German bank believed that the export weakness may be due to the lack of pricing power among Asian exporters as seen in weak inflation.
The latest modest Purchasing Managers’ Index (PMI) readings in the region showed that purchasing managers are skeptical about the outlook amid disappointment with trade.
This development is somewhat paradoxical as the U.S. labor market appears strong with sizeable gains in jobs over the past year and incipient signs of wage pick-up.
Nomura Equity Research said this is in part because Asian exporters have become more dependent on aggregate emerging market demand, including intra-Asia such as China, and overall emerging market demand has been weak.
As HSBC Global Research (NYSE:HSBC) has explained, growth across emerging Asia since the global financial crisis in Y 2008 has in large part been driven by an increase in debt.
HSBC pointed out high debt burdens posed 3 problems for Asian economies, as follows;
1. Debt-to-GDP ratios cannot rise forever,
2. when interest rates increase, growth and financial stability could take a knock, and ,
3. the credit intensity of GDP growth continues to rise in Asia, meaning that in order to maintain even the disappointing economic growth rates of the past couple of years, credit would have to expand even faster than before.
Now with debt growth slowing, the rising credit intensity means GDP economic growth in Asia is coming under even greater pressure as lending decelerates. HSBC thus urged Asian economies to implement structural reforms to boost productivity growth and reduce their dependence on debts.
If the Asian emerging economies fail to carry out reforms, debt will continue to become ever more important to support demand, and this is obviously not a sustainable proposition to improve economic growth in the future.
Stay tuned…
HeffX-LTN
Paul Ebeling
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