Asia economies may ease in first half


  • Business
  • Wednesday, 11 Apr 2007

PETALING JAYA: Growth of Asian economies is expected to ease in the first half this year, in tandem with the slowing of the US economy, said CIMB head of economic research Lee Heng Guie. 

Lee, who sees a soft landing for the United States, said America's economy was showing “mixed signals”. 

“Economic growth has decelerated from 4.1% in the first half of 2006 to 2.1% the following six months, dragged down by the housing sector's downturn,'' he said. “The good news is continued job gains in the US labour market and improving real wages, which are supporting consumer spending.” 

However, Lee said, there were concerns the rising number of subprime mortgage delinquencies could spill over to the broader economy and take a toll on consumers. 

He said Malaysia's economy was not held back by slowing exports owing to the resilient domestic demand spurred by healthy private and public sector spending. 

Lee has forecast a 5.6% gross domestic product (GDP) growth rate for Malaysia this year. 

Turning to the region, he said, the slowdown in exports would continue to dampen Singapore's growth, but increased consumer spending had provided Indonesia with a strong base for economic expansion going forward. However, unfavourable domestic conditions would put the brakes on Thailand, while Hong Kong should benefit from a positive labour market. 

An economic team at Standard Chartered Bank thinks that despite the current turbulence in equity markets, ample liquidity and solid economic fundamentals will remain constructive for Asia's outlook and attractiveness to investors. 

The bank's senior economist Stephen Green said while the Chinese yuan maintained its strength – and equities remained volatile – the country's economy “continues to boom”. 

“Fundamentally, the economy remains strong and, more importantly, so do profits. In the trade sector, margins have also strengthened, despite the appreciation of the renminbi,” Green said, adding that China's stock market had never been a good indicator of the economy's health, and recent events had reiterated that view. 

JP Morgan Chase Bank economists Frank Gong and Grace Ng, who have forecast a real GDP growth rate of 10% for China, said the People's Bank of China had been stepping up efforts to rein in excess liquidity from the elevated trade surplus in the first two months this year. 

“Bank loan growth has rebounded since the start of the year and investment is likely to accelerate. The domestic A-share markets have recovered quickly from the late February correction, so policymakers have become increasingly concerned about the potentially disruptive impact of excessive liquidity,” they said. 

JP Morgan also expects the central bank to increase by a further 50 basis points the reserve requirement ratio for deposit-taking financial institutions, bringing the ratio to 11% by mid-year. 

The investment bank thinks that a faster yuan appreciation is essential to moderate trade surplus and tighten the overall monetary conditions in China. 

Citigroup Global Markets believes the most important events that will determine the direction of the world's economy are the interaction of political cycles in China and the United States.  

Citigroup economist Huang Yiping said Chinese leaders could gain more authority in their policymaking, while US policymakers could be increasingly protectionist. 

In a report released this month, he said: “While time is needed to assess the long-term impact, short-term consequences could include quicker economic adjustments in China, including faster appreciation of the renminbi. This will have important implications for the rest of the region.” 

On Malaysia, Citigroup said inflation was on track to hit the official forecast of 2%–2.5% in 2007. A benign inflation outlook would, therefore, reduce the need for a near-term rate hike, it said. 

The scope for a rate cut was limited as well because the real interest rate was already at accommodative levels, it said. 

Hong Leong Group's fixed-income and economic research department said it expected the Bank of Japan to hold interest rates at its next policy meeting. It also said the yen carry-trades were “becoming popular” once more, and with fundamentals not working for the currency, the yen's weakness was expected to persist.

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