Economists rethink Asia’s doom-and-gloom scenarios

Reuters: The glass is half full again for Asia’s economies. Some economists have begun downplaying the darkest of the worst-case scenarios for Asia now that Europe appears to be muddling through its debt crisis without imploding and the United States finally shows signs of a self-sustaining recovery.

That doesn’t mean Asia’s economic growth is about to take off. But it does suggest that growth will not suffer quite as dramatically as some forecasters had feared -- and inflation may not abate quite as swiftly.

Goldman Sachs said on Tuesday it no longer expects any more interest rate cuts this year in Malaysia, Indonesia, South Korea, Thailand or the Philippines, largely because of an improved economic outlook in the euro zone and the United States.

Australia’s central bank held interest rates steady on Tuesday, partly on expectations that economic growth will remain at trend, surprising markets which had looked for a cut.J.P. Morgan raised its growth forecasts for southeast Asian economies last week and said it may do the same for Japan as manufacturing activity picks up. The bank said January economic data showed economic momentum picking up around the world.

“At this stage, we are not sure what it is, and are making only modest upward growth revisions, but something is happening here and the risks to our first-half global growth forecast have shifted significantly to the upside,” economist Bruce Kasman wrote in a note to clients.

Just a few months ago, the big fear was that European banks would yank money out of Asia to cope with a worsening debt crisis in their home markets, sparking a credit crunch.

Data from the Bank for International Settlements showed lending to emerging markets fell by a modest $10 billion in the third quarter, with most of the money coming out of Eastern European countries rather than Asia.

The other major concern was that China’s economy would stumble as its housing market slowed and export demand dried up. But fears of a China collapse have faded since October.

Chinese GDP will grow at an above-consensus 8.6 percent in 2012 according to Michael Buchanan, Goldman’s chief Asia economist, who added that any softness in January economic data is largely due to the Chinese New Year when overall activity slows.

“When we look at January and February combined, whether its the loan growth, inflation or activity numbers we would expect all of those to look pretty strong,” said Buchanan at Goldman’s 2012 Global Macro Outlook Conference in Hong Kong.

Adding to optimism over China, a healthier outlook for Asia’s two largest trading partners -- the United States and the euro zone -- led Goldman economists to take out their expectations of 50 basis points of “precautionary” rate cuts across several Asian countries. The rate cuts were seen as a way for Asian central banks to offset the impact of a worsening global economy and tighter financial conditions arising out of euro zone bank deleveraging.

Both those fears are now receding.

Market activity reflects the brighter prospects. The cost of insuring against a Chinese debt default has fallen sharply in recent months, with 5-year credit default swaps at 125 basis points on Monday compared with 200 in October.  In equity markets, short-selling in Hong Kong as a percentage of total turnover on the local stock exchange is back to historical average levels of about 8 percent, down from more than 10 percent a few months ago.

Goldman isn’t the only bank rethinking the worst downside risks. Back in November, economists at Nomura put a one-in-three chance on China’s economy suffering a “hard landing” starting before the end of 2014, with growth slipping to an average of 5 percent or less over four consecutive quarters.



On Friday, Nomura said it was sticking with its one-in-three likelihood “but now have a bias to think it less likely.”

Other economists have scaled back their expectations of rate cuts from Indonesia, Malaysia and other southeast Asian economies because both growth and inflation have been stronger than anticipated. A strong U.S. employment report last Friday, which showed job creation broadening out across the economy, followed a string of better-than-expected data that has underpinned a 7 percent rally in the S&P 500 this year.

Europe, which became the barometer of the “risk-on-risk-off” trade that characterized financial markets through 2011, remains a potential stumbling block.

Indeed, the International Monetary Fund warned on Monday that China’s rate of growth could be cut nearly in half if Europe’s debt crisis plunges the world into a recession.

But many private economists argue the threat looks far less severe now than it did last year. While most economists still expect a recession in the euro zone, the current view is that it will be far milder than what was earlier feared.

“Last week we revised up our forecast for euro area growth,” said Huw Pill, a former European Central Bank (ECB) researcher and Goldman’s chief European economist, adding that it was the first time in the past year that they raised their growth forecast for the region.

Perhaps more importantly, the stabilizing effects of the ECB’s long-term refinancing operations (LTROs) have helped soothe fears around Europe’s banking system, said Goldman.