Tuesday, February 1, 2011
Shades of Gray for Asia Economic Forecast
HONG KONG — Economists here in Asia could be forgiven for harboring a sense of nostalgia for 2009 and 2010. Back then, things were simple. The entire region, with the notable exception of Japan, was booming, and making economic forecasts was easy.
But 2011 looks entirely more complex as inflation worries, policy concerns and uncertainties over the growth paths of China and the rest of the world combine to make it much harder to forecast how the economies and markets in the region will fare. Regional economic data released Tuesday highlighted just how many shades of gray now cloud the once-bright picture for emerging Asia.
In China, manufacturing activity fell slightly in January, showing that the economy, which became the second largest in the world last year after that of the United States, is cooling. A purchasing managers’ index released by the China Federation of Logistics and Purchasing came in at 52.9, below the 53.9 recorded in December.
“This indicates that the economic recovery trend is not yet clear, and we may see economic growth slow down a bit,” Reuters quoted Zhang Liqun, a government researcher, as saying in a statement accompanying the release.
The P.M.I. reading still showed expansion and did not indicate that China was screeching to a painful halt. In fact, many observers welcomed the softer reading as a sign that China could be headed for a soft landing, not a hard one, as measures to slow the economy announced by Beijing over the past year bear fruit.
“The moderating trend is welcome news in view of concerns about overheating,” Stephen Schwartz, an economist at the Spanish bank BBVA in Hong Kong, said in a note Tuesday. Like many other banks, BBVA expects the pace of growth in China to moderate to 9.2 percent this year, from 10.3 percent in 2010.
Still, the data, and Mr. Zhang’s comment, showed that it had become much tougher for economists to assess China’s progress — and for policy makers in Beijing to tweak the country’s economic machinery in such a way that inflation, but not overall economic growth, would be stifled.
A similar picture applies across much of Asia: Growth remains buoyant, but is by now accompanied by rising inflation and increasingly complex policy challenges.
Data released by South Korea on Tuesday, for example, showed that exports had surged 46 percent in January from a year earlier — good news for an economy that relies heavily on trade.
But on the downside, consumer prices were 4.1 percent above where they were in January 2010, a marked increase from the pace of 3.5 percent recorded in December.
South Korea, said Wai-Ho Leong, an economist at Barclays Capital in Singapore, is “entering a high-growth, high-inflation environment.”
Similarly, in Indonesia, figures out Tuesday showed that inflation had accelerated in January, with prices up more than 7 percent from a year earlier.
Japan is the main exception in Asia, and its problems are just the opposite. With an economy that is growing only at a snail’s pace and tenacious deflation, Japan was downgraded last week by the ratings agency Standard & Poor’s.
The reason for the surge in inflation in other parts of Asia? In part, rising prices have stemmed from rapid growth — which has fueled demand for goods and caused salaries to rise — and the easy credit conditions that governments put in place to support their economies during the crisis.
In addition, overseas investors have poured large sums into emerging Asia in a bid to capitalize on the strong growth and higher interest rates that prevail in much of the region. This has caused currencies like the Thai baht, the Malaysian ringgit and the Indonesian rupiah to rise rapidly since last year, undermining those nations’ competitiveness when it comes to exports.
The inflow of capital has also prompted fears of asset bubbles in sectors like real estate in some countries.
Finally, rising prices for raw materials — especially for oil, which has risen sharply recently because of the unrest in Egypt — further fan inflation.
Not all economists see the current inflation levels as a major worry — some believe that poor weather conditions are largely to blame and argue that inflation will ease again later this year.
Others, however, say that policy makers need to fight inflation much more aggressively.
Food price increases, in particular, can have a devastating effect on the millions of low-income households in developing nations, Dominique Strauss-Kahn, managing director of the International Monetary Fund, said in a speech in Singapore on Tuesday.
The problem, analysts say, is that politicians and central bankers face a difficult balancing act, and it is hard to predict how they will react.
On the one hand, their desire to slow growth and damp inflation means higher interest rates are needed. Many central banks have started to nudge up the cost of borrowing — and are under considerable pressure to do still more.
On the other hand, raising rates too quickly could choke the economy.
And higher rates also could attract yet more inflows of capital from abroad, fueling the rises in asset prices and currencies that policy makers are so eager to avoid.
Will they get it right and nip inflation in the bud without harming their economies? Not everyone is convinced.
“There’s a reluctance to raise rates quickly,” said Rob Subbaraman, regional economist at Nomura in Hong Kong. Many nations have chosen to constrain price rises through other steps, like taxing inflows from overseas, and there’s a danger that such steps will lose their effectiveness over time, he said.
“I am not terribly confident that they will get it right,” said Frederic Neumann, regional economist at HSBC, at a recent news briefing in Hong Kong. Central banks, he said, will err on the side of caution. “The price for this will be paid in the more distant future.”
New York Times