Overview: Most of Asian economies released stronger-than-expected Q2 2009 GDP figures, showing a V-shaped recovery may be in the cards. Relatively strong macroeconomic fundamental and initial conditions, aggressive fiscal and monetary policies and surging capital inflows all support this argument. Despite some improvements, real economic conditions remain fragile. Exports are falling at double-digit rates for most of countries, though the contraction has eased somewhat thanks to inventory restocking. Consumption remains weak due to negative wealth effects amid worsening labor market condition. Investment is declining sharply, reflecting tight credit condition and still-weak demand at home and abroad. Government spending was largely insufficient to support growth. Therefore, economic activity is expected to remain weak in H2 2009 and 2010, considering stimulus effects begin to fade and private sector deleveraging in advanced economies will continue to keep both exports and investment weak. Asian economies will recover on a sustained basis, accompanied by any meaningful revival in external demand in the advanced economies.
Asia's Recovery Prospects Hinge on G3 Recovery?
* ADB: "Asia will lead the recovery from the global slowdown" on the back of aggressive monetary and fiscal stimulus measures, relatively strong financial systems, faster-than-expected rebounds in less-export dependent countries. However, the recovery might be hampered by a prolonged global recession or an earlier-than-expected withdrawal of stimulus measures. Developing Asia is expected to grow by 3.9% in 2009 and 6.4% in 2010. (Asian Development Outlook; September 22, 2009)
* IMF: The growth forecast of Emerging Asia has improved, driven by better prospects in both China and India and a faster-than-expected turnaround in capital flows. But the acceleration in growth hinges critically on the recovery in developed economies. Emerging Asia is forecast to grow 5.5% in 2009 and 7% in 2010. Japan will contract sharply at 6% in 2009 but will grow 1.7% in 2010 due to aggressive fiscal policies and strong performance in neighboring Asian economies. (IMF Outlook, July 8, 2009)
* World Bank: Despite aggressive government measures, growth in East Asia and the Pacific will slow to 5% in 2009 from 8% in 2008 due to weak exports and a slowdown in domestic demand. Yet the region will grow the fastest in the world, helped by China. Ultimate recovery depends on the pace of recovery in advanced economies. Growth in 2010 will be relatively subdued at 6.6%. An output gap will persist for several years because of weak labor markets and sluggish consumption. (World Bank Outlook, June 2009)
* FT: "Too early to declare a V-shaped victory." Much of the recovery in the region is created by base-period effect. Domestic demand is still-weak and fiscal stimulus cannot be rolled out as it would create risks of overcapacity, asset price inflation and damage to the financial system (July 26, 2009). In addition, Asia has flunked the longer-term economic rebalancing, evidenced by still-weak domestic demand. The current account surplus has widened as imports fall faster than exports. Central banks are intervening FX markets to prevent currency appreciation amid exports slump. (Lex, July 23, 2009)
* EIU: Asia's growth will slow sharply to 2.4% in 2009 due to high export dependence and risks to investment and employment. The recovery will be subdued in 2010, growing by a mere 4.6%. This will be due to weak demand in advanced economies, tight access to credit and risk of capital flight, despite some improvement in global risk appetite. Aggressive loosening of monetary and fiscal policies will support growth and ensure a U-shaped recovery in the region. (July 17, 2009)
* Analyst Tomo Kinoshita, Nomura: Asian economies will recover 2008 GDP levels in 2011. "As Asian economies reach full-employment conditions and thus close the output gap in 2011, the driver of investment growth should shift from public investment initiated by fiscal stimulus in 2009 to private investment in 2011." (August 7, 2009)
* Johanna Chau, Head of Asia Pacific, Citi: Asia's recovery is V-shaped, backed by aggressive policy stimulus, export inventory restocking cycle for tech, sharp inflation collapse and some help from incremental demand from China. But the upturn may not be strong as deleveraging in the advanced economies will reduce the region's potential growth, especially for countries more dependent to previously credit-fueled exports markets, including Singapore, Malaysia and Taiwan. (July 24, 2009)
* Paul Gruenwald, Chief Economist Asia, ANZ: Emerging Asia's recovery path will depend on a combination of demand momentum, export dependency and the likely effectiveness of fiscal policy. But Asia will be unable to recover without a resumption of external demand in the advanced economies. (July 3, 2009)
* Analyst David Carbon, DBS: A V-shaped recovery is taking place in Asia as the drivers of downturn were "one-off" in nature not the "fundamental weakness." (June 11, 2009)
* Analysts Chetan Ahya and Deti Tan, Morgan Stanley: Growth will bottom out in H1 2009, with muted recovery in H2 2009. (January 16, 2009)
* Analysts Bill Belchere and Rajeev Malik, Macquarie: The U.S. recession will have a greater impact on Asia than the 2001 recession, with Asian exports and countries with high external financing needs (South Korea, India and China) taking a big hit. (March 13, 2009)
* 2009 AXJ GDP Growth Forecasts: Nomura: 4.9% | Citi: 4.6%| ANZ: 3.8% | EIU: 2.4% | RGE Monitor: 4.3%
* 2010 AXJ GDP Growth Forecasts: Nomura: 7.7% | Citi: 7% | ANZ: 6.5% | EIU: 4.6% | RGE Monitor: 6.2%
What Are Risks to Growth?
* Domestic Demand: Consumer spending has improved in some countries because of stimulus measures. But in most Asian Tigers and ASEAN countries, consumption is contracting or slowing sharply due to negative wealth effects from large job losses in manufacturing and export-related sectors. Investment is contracting or slowing sharply in most Asian Tigers and ASEAN countries due to plunging foreign direct investment (FDI) and exports, lower corporate earnings and tight credit.
* Exports: Exports contracted sharply across Asia in H1 2009 due to lower demand from the G-3, though industrial production turned around in many Asian countries. China's stimulus spending in 2009 is mostly geared toward infrastructure. So most Asian countries that export parts and components to China for re-export to the G-3 countries will not benefit. Benefits to Malaysia, Indonesia and Vietnam will be limited as they export manufacturing-intensive commodities to China. Asia's exports will remain under pressure until final demand in advanced economies shows a strong and sustained improvement.
* Tight Financial Conditions: Despite aggressive monetary easing and improvement in liquidity conditions, private lending rates remain elevated, and banks see high credit risk lending to corporates and households. Capital-raising activity remains subdued. On the other hand, in countries like Vietnam and China, government stimulus measures are fueling asset bubbles.
* Capital Flows: Foreign institutional investor (FII) inflows are fueling market rallies but are still prone to global risk aversion and volatility in the U.S. markets. FDI will drop in most Asian economies in 2009. Debt inflows are already under pressure because of declining interest-rate differential with the U.S. and rising debt downgrades. A global liquidity crunch is sharply reducing Asia's access to foreign bank capital. Easing external balances and capital outflows may lead to currency depreciation in the region. (Nomura)
* Deflation: Excess capacity in manufacturing, rising unemployment and slowing or contracting domestic demand in many countries are causing deflationary pressures. China, Hong Kong, Malaysia, Singapore, Taiwan, Thailand and Japan are in technical deflation. Some impact is due to base effects as food and commodity prices are lower relative to 2008. Deflationary pressures might persist until late 2009 or early 2010 due to sluggish economic recovery and large output gaps.
* Fiscal Deficit: Increasing stimulus spending amid withering income-tax- and commodity-related revenues are raising fiscal deficits and public debt. Investor concerns over rising bond issuance and higher longer-end yields are posing risk to debt auctions. Debt ratings of many countries (Japan, India, Taiwan, Thailand, Malaysia, Pakistan and Vietnam) have been downgraded or are at risk.
* Political Risk: Political stability has strengthened after elections in India and Indonesia. Thailand and Japan are witnessing increasing political instability exacerbated by the economic downturn. China and Vietnam face the risk of greater social unrest from job losses among migrant and factory workers.
