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Asia Inflation Has Peaked, Region’s Growth to Overtake U.S. And Europe, Morgan Stanley Says

Asia’s growth is set to outpace that of the U.S. and Europe’s by the end of the year as the region has been largely spared from interest rate shocks, said Morgan Stanley.

“By the fourth quarter of this year, we think Asia’s growth will be outperforming U.S. and Europe by about 450 basis points,” the investment bank’s Chief Asia Economist Chetan Ahya said in a webinar on Tuesday, hours before the U.S. released its inflation print for May.

Citing reasons for his optimism, he said Asia is expected to deliver healthier growth rates while the West lags behind. On top of that, China’s broad recovery could come in the second half of this year, while three large Asian economies — India, Indonesia and Japan — are also showing robust domestic demand.

Asia inflation ‘not as intense’

“We’re definitely expecting growth in these two economies to be constrained by the fact that they have had this significant inflation problem,” Ahya said in reference to the U.S. and Europe.

Central banks in those markets are having to take policy rates into restrictive territory to bring inflation under control, he added.

“Asia has not had interest rate shock that U.S. and Europe has had,” he said, adding that Asia’s inflation has been running almost half the run rate compared to the other two regions.

The U.S. inflation rate has been holding well above the Fed’s 2% annual target.

Inflation slowed to 4% in May — the lowest rate in two years, after peaking at 9.1% in June last year. The Federal Reserve skipped a rate hike this week, as the fight against inflation showed some promise.

Just last month, the central bank implemented its 10th consecutive interest rate hike in over a year, marking the swiftest monetary policy tightening the Fed has undertaken since the 1980s.

Likewise in Europe, inflation in the euro zone fell to 6.1% in May, marking the lowest level since February 2022. The ECB raised its benchmark rates from -0.5% a year ago to 3.25% in May, the highest since November 2008.

“Asia’s inflation problem has not been as intense. And we think that region’s inflation has peaked,” he said. “By the time we are in September [or] October, 80% of [the] region’s countries would have seen inflation going back into central banks’ comfort zone.”

Central banks in Asia that have hit the brakes on interest rates include South Korea, Australia, India, Indonesia and Singapore.

China’s consumption ‘on track’

Another driver of Asia’s growth is China’s projected recovery in the second half of the year.

“We’re expecting China’s recovery to broaden out in second half of this year,” Ahya said. The bank is forecasting the superpower’s growth to be at 5.7% in 2023 compared to 3% last year.

“We think consumption recovery in China is pretty much on track,” he said. That is bound to also bring a positive spillover to other parts of the region as well, he said.

China’s consumer inflation data for May inched up 0.2% compared to a year ago, while producer price index fell 4.6%, recording the steepest year-on-year dip in seven years.

Ahya said that in the next three months or so, Chinese markets should see a good level of spending coming through.

The bank is also expecting the Chinese government to announce more stimulus measures in the form of relaxation for purchases of the property sector, as well as deliver about a trillion dollar worth of infrastructure funding program.

China cut its key lending rate on Thursday, lowering 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 type of short-term borrowing rate, from 2% to 1.9%.

India, Indonesia and Japan

Supporting the overall region’s growth rate is also India, Indonesia and Japan having their own domestic demand recovery cycles.

“India has been also implementing structural reforms over the last five years … that’s driving private investments higher,” Ahya said.

He predicted that India’s growth will come in at 6.5% in 2023, superseding International Monetary Fund’s forecast of 5.9% by 2023.

Indonesia’s implementation of orthodox macro policies has also reduced the Southeast Asian nation’s inflation structurally, the economist said, attributing it to the government’s commitment to keep fiscal deficit under 3%. That has led to Indonesia’s public debt to GDP ratio being one of the lowest in the emerging market space at under 40%, he said.

Morgan Stanley is of the view that Japan is in a “sweet spot” of leaving deflation behind yet not having inflation issues as acute as U.S. and Europe.

“That’s creating an environment where the economic machine works.”

Source : CNBC