Asia growth pessimists expect to score a hat trick against the optimists in 2014 and beyond. We disagree.
The bearish narrative goes as follows:
- Excessive leverage growth has left the region’s economies over-stretched, meaning weak growth at best and a potential crisis at worst
- Weak or negative productivity performance means soft growth and investment returns
- Demand for Asian goods remains subdued despite the recovery in the West, so the external sector will not come to the rescue of the world’s most open region to trade
However, we think these negatives are overblown.
Leverage is stretched only in some economies and sectors
First, as with every story, there is more to Asia’s leverage story than what the headlines say.
Excessive leverage has been built up in pockets of some of the region’s economies, including corporates in China, Korea, Singapore and India, and households in Malaysia, South Korea and Singapore. In aggregate, however, we believe the challenges are surmountable.
China’s leverage is the most concerning to us based on a broad range of metrics, but debt is concentrated in the corporate sector and with local governments.
“Even in China, we do not expect a crisis. The process of dealing with prior excesses is likely to be manageable”
China’s household sector is in healthy shape and is set to benefit as ongoing wage growth, urbanisation and financial-sector development enable households to take on more debt, cushioning consumer spending against shocks.
India and Indonesia, the region’s next-largest emerging economies, have plenty more room to use leverage sustainably to boost the strength of the consumer.
Even in China, we do not expect a crisis. The process of dealing with prior excesses is likely to be manageable, as debt is concentrated in the state-owned and local government sectors rather than the household sector.
Monetary easing is already taking place, with the seven-day repo rate now averaging 3.4 per cent, well below its December-January levels.
Asia’s productivity has outperformed since 2000
Second, the perception that Asian economies are driven by capital accumulation, with zero or even negative productivity – defined as the rate of output per unit of input (capital and labour) – is outdated.
Asia’s productivity performance has been solid across the board since 2000. Even excluding China, the Asia-ex Japan (AXJ) region has outperformed other emerging markets in terms of productivity. This has been achieved even as the capital intensity of growth has declined in AXJ excluding China.
While the region’s productivity has slowed recently, this has been in line with the rest of the world, coinciding with the current soft patch in the global economy. We expect Asia’s productivity to rebound as the global growth cycle gathers pace. There is also room for reforms to boost the region’s productivity following many of the electoral cycles in 2014.
Exports to the West are improving
Third, we expect external demand to provide more of a boost to Asia’s growth in 2014-15 than in the past few years. We disagree with the notion that the US recovery is ‘importless’. The export pattern around the region so far in 2014 has been one of improving exports to the US and Europe.
The key point that gets ignored in the ‘importless recovery’ argument is that the US trade deficit excluding petroleum has been widening since 2010. This means that the US is having a positive impact on global growth outside of petroleum-producing economies, which include the majority of Asian countries.
“We expect the growth optimists to win out against the pessimists in 2014 and 2015”
US consumption is likely to gain positive momentum in 2014. Mortgage rates have fallen, which is a positive leading indicator for the housing market. Also, the US is only part of Asia’s external growth story. Europe was still in recession in 2013 and is likely to grow 1.3 per cent in 2014, based on our core scenario, helped by improving consumer spending.
How well China’s domestic demand holds up is more of a concern for markets in Asia. Asia’s broad export pattern so far in 2014 has been better demand from the US and Europe and soft figures for China. More stimulus measures in China in the second half of this year may counter the country’s engineered slowdown in credit growth.
We expect the growth optimists to win out against the pessimists in 2014 and 2015 as the global recovery improves and this should be good news for current account balances in the region.
The main risk to our view is if China scores an ‘own goal’ – in the form of a policy error – that causes a major growth driver of the region to stall. While this risk cannot be fully ruled out, there are already signs that Beijing is open to further policy easing to ensure the 7.5 per cent 2014 growth target is achieved.
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