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Starting 2008, stock markets have been tracking global macroeconomic developments like never before and as 2011 comes to a close, there are Eurozone risks as well, not to mention India's burgeoning fiscal deficit and the weakening rupee. Meanwhile, with Asian economies, barring Japan, moving in the same direction and vying for foreign capital, we took a media call from Nomura Research to get a better handle on what is in store for Asia in 2012.
Slowing GDP
Asian economies could stumble in the first half of 2012 before setting their own rostrum for a V-shaped recovery. That was the main message.
According to Mr Rob Subbaraman, Chief Asia Economist at Nomura, Asia's GDP growth is expected to slow from 7.5 per cent in 2011 to 6.6 per cent in 2012, impaired by both the Euro zone crisis as well an expected slowdown in China.
India's growth, forecast at 7.2 per cent for 2012, is expected to be well above the region's average growth, albeit lower than its own expansion in 2011. Despite an anticipated slowdown in growth, China is expected to remain the top growing economy not just in Asia but globally as well.
For all economies in Asia, ex-Japan, the slowdown is expected to be a story of two halves. The region is expected to weaken to a nadir of 6 per cent for the first six months and then recover to 7.6 per cent in the last quarter.
Triggers for slowdown
The Euro zone crisis, coupled with a slowdown in China, can depress growth for South Korea, Taiwan, Hong Kong, Singapore, Malaysia and Thailand as exports account for well over 50 per cent of their respective GDP.
The shipments of these economies are likely to be hit as a result of lower demand. There is already evidence to this, with inventory levels in Korea and Taiwan at record levels, 33 per cent (on an average) higher than levels during the low-point of US financial crisis.
Shipments have also been tapering off in recent months, raising concerns of a slower Asian production. While Asia received support from global demand during its financial crisis in 1997-98 and China helped consume Asian produce during the 2008 US financial crisis, this time around, the support systems appear weak.
India's exports, too, are expected to remain in single-digits in 2012. The good news though, is that its economy is less dependent on exports compared with its peers and, to that extent, slowing exports' influence on GDP will be lower than the other countries.
For China, even as exports, which account for a third of its GDP, are set to weaken, risks to growth could come in the form of the already slowing private and public housing investment. This can be expected to have a negative impact on heavy industries such as steel and cement, besides slower construction activity.
An interesting data point from Nomura shows that 58 per cent of China's imports in the September quarter was used up domestically and not processed and assembled for export. This has increased from 44 per cent in early 2007. That means China is no longer simply an assembly point, but an end-consumer too. And, to that extent, China is beginning to matter a lot as a trade partner to other Asian economies.
Risks from Eurozone
Even as the export economy slows, risk of capital flight from a meltdown in the Eurozone could impact Singapore and Hong Kong more than the others. Lending from Eurozone banks accounted for nearly a third of these countries' GDP as of June 2011. The Eurozone region lent $61.4 billion to India. That's 3.4 per cent of GDP.
While it is not clear how much of India's Eurozone borrowing is due for payment in the near term, of international banks' total claims (according to Bank for International Settlements) on India, 60 per cent is due within a year. This, when viewed against our foreign exchange reserves of little over $300 billion, does pose a repayment risk for India said a Nomura economist to a question posed by Business Line .
Provoking a rebound
The tailwinds for the Asian economies could come in the form of lower commodity prices and loosening policy measures. With lower growth and easing inflation post the first half of the year, Nomura expects all Asian central banks to cut their policy rates in 2012.
This can be expected to improve credit availability to domestic companies strapped of funds. Leadership change in China together with general elections in many of the Asian countries can motivate governments to focus on policies targeting infrastructure investment and social spending.
For India though, the fiscal deficit is likely to provide little room for any fiscal stimulus. Nomura expects a 50 basis-point cut in policy rates of India by the June quarter of 2012. Core inflation is expected to ease considerably. This, together with lower commodity prices, may hold the key to offset the damage caused by a weakening rupee for India. Failing this, the economy may be impaired much more than forecasted.
Equity markets
The takeaways for the equity markets from Nomura's outlook are twofold: One, some solution to the Eurozone crisis can be expected by the end of the first quarter of 2012. Two, the domestic economic issues such as inflation, interest rates and slower production may bottom out by first half of the year. This could provide some early turnaround signs for equity markets.
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