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Will 2014 be any different for Asian economies?
Publication Date : 07-01-2014
Despite some reports that Europe may have turned the corner, most analysts are still not convinced the worst is over.
However, data from the US point to an improvement in economic conditions, which prompted the Federal Reserve to announce on December 19 that it would begin cutting back on its quantitative easing (QE) programme in January.
Outgoing chairman Ben Bernanke said the Fed would cut its monthly bond purchases from US$85 billion to US$75 billion.
Since the global financial crisis began in November 2008, the US had introduced a series of QE programmes in an effort to kick-start the US economy and drag it out of the worst financial crisis since the depression of the 1930s.
The current round (QE3) began in September 2012 with the Federal Reserve buying $85 billion in mortgage-backed securities a month.
2014: Firmer growth expected
The Guardian recently said that QE3 “has added US$1.1 trillion to the Fed’s balance sheet and critics have worried about unintended consequences like a housing bubble or artificially inflated stock markets”.
Over the summer of 2013, global markets went into a tailspin when Bernanke hinted he may begin tapering the QE programme sooner rather than later.
Asia was not immune from the fallout, although analysts say the impact on markets from the Fed’s announcement will be limited.
An encouraging factor is the recent budget agreement by the US Congress to restore about US$65 billion in automatic spending cuts, removing the threat of another partial government shutdown.
“The agreement still has some way to go but it is a good start nevertheless,” says economist Joseph Zveglich.
“It has removed another layer of uncertainty over the US economy,” says Zveglich, assistant chief economist with the macroeconomics and finance research division of the Asian Development Bank (ADB).
“Hopefully we can now stop lurching from one temporary deal to another and get more stability behind US growth and more certainty around the country’s fiscal situation,” he adds.
Speaking to China Daily Asia Weekly from the ADB office in Manila, Zveglich says all the economic indicators now coming from the US are pointing to reasonably strong growth in 2014.
“I don’t expect we will see any major impact from tapering,” he says. “The Fed has given plenty of warning and guidance and markets have priced the risk. That is not to say we won’t see some reaction … we probably will. But I doubt it will be on the same scale as we saw in the summer.”
The ADB in its outlook supplement in December 2013 raised its 2014 growth forecast for the US from 2.4 to 2.6 per cent.
The multilateral bank also raised its 2014 growth forecast for China, from 7.4 per cent to 7.5 per cent. India will remain unchanged at 5.7 per cent with Asia as a whole at 6.2 per cent compared with 6 per cent in 2013.
The International Monetary Fund (IMF) in its regional outlook has said it expected Asia to “remain the world’s economic growth leader”.
“We are essentially optimistic that, despite the more complex global environment, Asia will remain a growth leader,” said Anoop Singh, director of the IMF’s Asia and Pacific department.
Asia’s economy as a whole is expected to grow from 5.1 per cent in 2013 to 5.3 per cent in 2014, while emerging Asia is projected to grow from 6.3 per cent to 6.5 per cent in 2014.
Growth in China is projected to decelerate to 7.6 per cent in 2013 and 7.3 per cent in 2014 as structural forces move China steadily onto a lower growth plane, according to the IMF.
Japan’s improved economic situation has been a bright spot in the region as the so-called Abenomics programme — a stimulus package — has reignited the economy and is starting to lift the country out of chronic deflation.
Financial conditions have eased markedly as a result of the exchange rate depreciation and the asset price rally triggered by quantitative and qualitative monetary easing, noted the IMF.
In India, the fallout from recent financial stress might have contributed to greater vulnerability of corporate and bank balance sheets and a further downward revision of growth forecasts, which were already very low in historical context, the IMF said.
“This reflects persistent supply constraints and slow progress on structural reforms. Despite weak demand, however, food prices will likely keep headline inflation close to double digits,” it said.
The ADB says an improving growth outlook in Japan and the US, paired with stronger-than-expected performance in China, support a steady growth outlook for developing Asia in 2014.
Rob Subbaraman, chief economist for Asia ex-Japan at Nomura, believes the time has come for Asia’s policymakers to shift their focus towards financial stability over growth.
“Strong capital inflows, systematically loose monetary policy and a neglect of supply-side reforms have weakened Asia’s economic fundamentals since 2008,” he said in Nomura’s outlook for 2014.
“Rather than seeing it in the positive light of global rebalancing, the much larger shrinkage of current account surpluses in Asia than elsewhere is symptomatic of Asia’s worsening fundamentals.”
He said it was Asia’s turn to go in for austerity to soften domestic demand while ensuring more sustainable growth.“Even with a recovery in exports, we expect Asia ex-Japan’s total GDP growth to fall below 6 per cent in 2014 — in other words, Asia will rely more on the rest of the world for growth, not vice versa,” Subbaraman said.
A new phenomenon that they anticipate is growing unevenness among Asia’s economies, in terms of growth, fundamentals and central bank actions opening up the biggest disparities in decades, he added.
Subbaraman said in the last five years, Asia had made the “costly mistake of neglecting supply-side reforms, such as relaxing restrictions on foreign direct investment (FDI), removing government fuel subsidies, accelerating privatization, opening up services sectors, lowering employment protection and liberalizing capital markets”.
“These reforms can be painful in the short run, but are essential in the long run to boost productivity and competitiveness — and they are even more pressing in Asia, given half the region is facing rapidly aging populations and as the low-hanging fruit of productivity gains from economic ‘catch-up’ are becoming less plentiful.”
He added that evidence was building about how Asia has squandered this opportunity, raising the risk of countries becoming stuck in middle-income traps.
Sanjay Mathur, head of economics research Asia ex-Japan with RBS, said he expected Asia, excluding Japan, to grow by 6.5 per cent in 2014, moderately up from 6 per cent in 2013.
The main reasons for the modest acceleration are firmer growth in external demand from the US and the European Union, as well as the ongoing pick-up in China’s growth, Mathur added.
“The region’s business cycle has become closely intertwined with China’s, predominantly due to the latter’s rise as a key export market.
However, support from China’s growth is least apparent in India, Indonesia and Malaysia, as they are least linked up to China via exports,” he said in a note.
The primary driver of growth in 2014, in his view, will be external and not domestic demand.
He said inflation in India, Indonesia, Singapore and Malaysia is likely to be elevated, but due to policy developments.
David Carbon, chief economist with DBS, sees growth in the US rising from around 1.6 per cent in 2013 to 2 per cent in 2014.
“This should put a little positive slope back into the Asia-US export picture,” he said.
Despite the turmoil in Europe and the US since the global financial crisis in 2008, Asia has had to fend for itself, Carbon said in a note.
During that timeframe, he estimates, Asia has added “1.25 Germanys to the economic map”.
“That’s not small beer,” Carbon said. “Even with slower (7.5 per cent) growth in China, Asia ‘adds’ another Germany every four years. That Asia could drive its own growth used to strike many as heretical. Today, it’s conventional wisdom.”
Regionally, the good news is that China continues to grow at a 7.7 to 7.8 per cent rate and is beginning to show signs of stronger private demand, he added.
“India’s current account deficit has narrowed to 2 per cent of GDP and Indonesia’s private consumption growth remains solid at 6.1 to 6.2 per cent year-on-year,” he added. DBS expects Asia’s growth in 2014 to be 6.4 per cent.