Choppy waters for Asia's economies, but clearer sailing ahead
Data is everywhere. Faster credit growth in China, slowing gross domestic product in Japan, resilience in Indonesia, a dip in Taiwanese export orders. Rather noisy.
The Lunar New Year has something to do with this, throwing economic data releases off early in the year, as usual. But cold weather in the U.S. doesn't help, either. We will not get a clean reading on where the global economy is headed, possibly until April. So, for now, think about the risks facing Asia along four broad categories. These suggest it could get bumpier again in the months ahead before stabilizing later in the year.
Every economy faces unique challenges, but four risks are particularly relevant in Asia. Start with tapering by the U.S. Federal Reserve. Last summer, the Fed's indication that it would begin winding up its extended program of quantitative easing roiled financial markets. With rates rising, so the argument went, emerging markets would see funding costs jump and debt-fueled growth grind to a halt. The prospect of a stronger dollar didn't help. In the event, however, markets digested the start of tapering quite well. Interest rates in the U.S., at least so far, have stabilized, trading lower on some measures than they did last summer.
An earlier bout of volatility notwithstanding, capital inflows into Asia have held up, with some currencies again gaining ground, even amid jitters elsewhere. Softer data in the U.S. has now added to the view that the Fed may not need to slam on the brakes. Alas, risks remain. The string of disappointing numbers may continue -- the weather, it turns out, is not entirely to blame. At the same time, the Fed seems on track to continue to taper.
That is a problem for emerging markets. The cutback in asset purchases by America's central bank has not been offset by faster growth. If data in the U.S. fails to bounce back from its winter lull, and the Fed tapers further at its upcoming meeting in March, investors may come to fear a double squeeze for hard-pressed economies.
No help from the giants
Next, Japan. Aggressive monetary easing by the country's central bank helped to stabilize financial conditions in neighboring economies. Bank lending and foreign direct investment have flown into Southeast Asia. Stronger growth in Asia's second-largest economy, over the past year provided support as well. Note, for example, that Japan's weak GDP growth in the fourth quarter was in part due to soaring imports.
Markets seem to expect additional easing by the Bank of Japan in April. The hike in the sales tax and resulting slump in growth may prompt monetary officials into action, but that is not certain. The BOJ is more likely to hold its fire until the third quarter, giving it enough time to judge the full impact of the hike. Without the expected stimulus from Japan, and falling demand, too, investors may reassess their view of Asia's resilience.
China is a source of risk as well. As in previous years, the economy may not snap back as quickly from its Lunar New Year pause as many investors expect. The weak preliminary purchasing managers' index for February suggests as much. At the same time, soaring credit growth in January may keep the central bank inclined to mop up more liquidity. Credit risk could also stay in the headlines in the coming months as the authorities strive to instill a more realistic pricing of risk. Ultimately, a "Lehman moment" still seems unlikely on the mainland, and extra stimulus measures should put a floor under growth. But it may be a few months before this becomes apparent to all.
Finally, recent stabilization owes much to the policy steps taken by emerging markets themselves. In India and Indonesia, officials hiked interest rates, brought down trade deficits and made encouraging statements about future policy. In Malaysia, too, the government signaled last year a hike in taxes and cuts in subsidies to address structural challenges. Reassuring stuff, but more needs to be done. And in the months ahead, questions about the policy path in the most vulnerable markets may again arise.
India, for one, faces an election starting in April. Indonesia, too, will head to the polls that month, with more voting to follow over the summer. Malaysia, by contrast, held its election almost a year ago, but the popular backlash against subsidy cuts has made the reform path a little more uncertain. None of this means these countries will not persevere with reforms. But with financial markets in a less forgiving mood, any hint of delay may not be taken lightly.
Asia, in short, faces four big risks. Over the next three months these risks may cause headaches, but they should abate and confidence should return.
Frederic Neumann is co-head of Asian economic research at HSBC.