Japan’s Mount Fuji seen on the Tokyo skyline on January 1, 2011.
Kazuhiro Nogi | AFP | Getty Images
Morgan Stanley said Asia will grow faster than the U.S. and Europe by the end of the year because the region is largely immune to the rate shock.
“By the fourth quarter of this year, we think growth in Asia will be about 450 basis points higher than the U.S. and Europe,” the investment bank’s chief Asia economist, Chetan Ahya, said in a webinar on Tuesday, hours after the U.S. Inflation data for 2018. possible.
He cited reasons for optimism, saying Asia was on track to achieve healthier growth rates while the West lagged behind. On top of that, China is likely to fully recover in the second half of the year, while Asia’s three largest economies – India, Indonesia and Japan – are also showing strong domestic demand.
Asian inflation ‘less intense’
“We definitely expect growth in both economies to be constrained by this serious inflation problem,” Ahya said, referring to the U.S. and Europe.
Central banks in these markets have had to bring policy rates within limits to keep inflation in check, he added.
“Asia doesn’t suffer from the rate shocks that the U.S. and Europe do,” he said, adding that inflation in Asia is almost half that of the other two regions.
US inflation has been running well above the Fed’s annual target of 2%.
Inflation slows to 4% in May – The lowest rate in two years, peaking at 9.1% last June. The Fed refrained from raising rates this week as the fight against inflation showed some promise.
Asia’s inflation problem is not that serious. We think inflation has peaked in the region.
Chetan Aya
Chief Asia Economist, Morgan Stanley
Just last month, the Fed raised interest rates for the 10th time in a row in more than a year, marking the most rapid monetary tightening by the central bank since the 1980s.
Also in Europe, inflation in the euro zone fell to 6.1% in May, the lowest since February 2022. The ECB raised its benchmark interest rate to 3.25% in May, the highest level since November 2008, from -0.5% a year ago.
“The inflation problem in Asia is less severe. We think inflation has peaked in the region,” he said. “By September (or) October, 80% of countries in the region will see inflation return to central bank comfort zones.”
Asian central banks that have hit the rate brakes include South Korea, Australia, India, Indonesia and Singapore.
Chinese consumption ‘on track’
Another driver of growth in Asia is China’s expected recovery in the second half of the year.
“We expect China’s recovery to expand in the second half of the year,” Ahya said. The bank predicts the superpower’s growth rate will reach 5.7% by 2023, compared with 3% last year.
“We think China’s consumption recovery is largely on track,” he said. This is bound to have positive spillovers to the rest of the region as well, he said.
A skyscraper in Jakarta, Indonesia on June 10, 2023. Indonesia’s implementation of orthodox macroeconomic policies has also structurally reduced inflation in Southeast Asian countries.
Nurphoto | Nurphoto | Getty Images
Ahya said the Chinese market should see good levels of spending over the next three months or so.
The bank also expects the Chinese government to announce more stimulus measures, including easing purchases of the property sector and offering an infrastructure financing plan worth about $1 trillion.
China cut its key lending rate on Thursday, cutting the one-year medium-term lending facility (MLF) by 10 basis points. On Tuesday, the People’s Bank of China cut the seven-day reverse repurchase rate, a short-term borrowing rate, to 1.9% from 2%.
India, Indonesia and Japan
Also supporting growth rates across the region are domestic demand recovery cycles in India, Indonesia and Japan.
“India has also been implementing structural reforms over the past five years … which has fueled growth in private investment,” Ahya said.
He predicted that India’s growth rate will reach 6.5% in 2023, That beat the IMF’s forecast of 5.9% for 2023.
Indonesia’s implementation of orthodox macro policies has also structurally lowered inflation in the Southeast Asian nation, the economist said, attributing to the government’s pledge to keep the fiscal deficit below 3 percent. That has left Indonesia with a public debt-to-GDP ratio of less than 40 percent, one of the lowest among emerging markets, he said.
Morgan Stanley argues that Japan is in the “sweet spot” to emerge from deflation but without the severe inflation problems seen in the U.S. and Europe.
“It’s creating an environment in which the economic machine works.”
—CNBC’s Jihye Lee contributed to this report.