ANCHOR REPORT: Quarterly Asia-Pacific Economic Outlook

Economics | Asia Pacific
Asian economies, already dealing with rising inflation, are likely to be confronted with slowing exports in 2H08F, under our assumption for the US to undergo a period of stagnation. Crude oil prices and the health of the global economy should remain key in determining Asia's economic prospects.
China factor governs global inflation

Quarterly Asia-Pacific economic outlook

China the key for global inflation
We believe it is vital to fully recognise the role played by China and other emerging economies during the prolonged economic expansion over 2002-07, whereby their rising exports diffused global demand-side inflationary pressures. But the resulting shortages of commodities resulted in the current global surge in inflation. Since the commodity inflation is global in nature, the expected global slowdown should ease further increases in commodity prices. However, the long-term economic expansion is finally expected to tighten China's labour market, generating demand-pull inflationary pressures there, especially from 2H09F, indicating that Asia will have to deal with inflationary pressures for some time to come.

Asia's economic growth to remain sluggish
We expect Asian economies will come under pressure from a deceleration in exports from 2H08F, based on our assumption that the US economy will experience a recession during 4Q08F and 1Q09F. On this basis, we now believe that the bottom for Asia's export growth cycle will be sometime during 1H09F -- we had previously assumed end-2008F would be the trough. We now forecast that exports will remain weak in 1H09F, only to recover modestly in 2H09F as the US economy regains some strength. Asia's economic growth prospects should follow a similar pattern.

China: economy and policy at turning points
China's real GDP growth was still high in 2Q08, at 10.1% y-y, prompting us to raise our real GDP growth forecast for 2008F to 9.6%, from 9.2% previously. However, our view that economic growth will decelerate considerably from 2H08F is unchanged, amid an expected slowdown in exports. Exports growth in real terms has already trended down, and slowed further to just 5.9% y-y in June. The economic deceleration is prompting the authorities to reconsider their tightening policies. We expect monetary policy will switch to a de facto neutral stance, with fiscal policy to become more accommodative. We also expect the pace of renminbi appreciation against the US dollar to slow.