The immaculate recovery

- "Seems like every time you turn around lately someone in the G3 is falling over. Earlier this year it was Europe: the Greek debt crisis spread across the continent, sovereign spreads rose and, in shades of Autumn 2008, libor-OIS spreads headed wider too. Belt tightening became the order of the day. Growth forecasts were lowered. Market sentiment soured."
- "None of this could be good for Asia, which, after all, exports as much to Europe these days as it does to the US. The region’s central banks, which had begun to tighten monetary policy in March, paused in May and June. No surprise; discretion is the better part of valor. But they resumed their hikes in July and August. Why? Because Europe wasn’t holding back Asia’s V-shaped recovery or its rapidly accelerating rate of inflation like they thought it might."
- "A handful of hikes in half a dozen countries later, it’s the US’s turn to take a spill. GDP growth drops to 1.6% (QoQ, saar) in 2Q10 and fears of a double-dip consume the markets. The Fed makes a symbolic shift back to strict neutrality and, rather than assuaging markets, only convinces them the sky is falling. Private sector hiring, still barely positive, drops to 67k in August from 107k in July."
- "None of this looks good for Asia either. The region’s central banks – still far behind the curve in normalizing interest rates – will once again put tightening on hold. They will, once again, wait to see how things pan out. And they will, once again, resume tightening in very short order."
- "By December, most of Asia’s central banks will be hiking rates again and we expect their ranks will, by then, include China and Indonesia, Asia’s two key holdouts so far (though Indonesia did raise reserve requirements by 300bps at one go last week, a move that’s probably equivalent to two 25bps rate hikes)."
- "How can Asia’s central banks push ahead with monetary tightening when the Fed is discussing QE2 (additional long-term bond purchases)? More to the point: why isn’t trouble in the US and Europe killing Asia’s recovery?"
- "The short answer is: the US and Europe did not contribute to it. Or very little anyway. If you only thrown a nickel into the pot, taking it back out again doesn’t change much."
- "Take a look at the consumption plots on the previous page. It’s important because consumption is the final demand that drives all other final demands, like investment or imports. At the end of the day, consumption drives global growth, period. And who is doing the driving? Asia. Almost by itself."
- "In the two years since Lehman Brothers imploded, consumption in the US has gone absolutely nowhere – it still has not returned to precrisis levels. Ditto for Europe. Ditto for Japan. But compared to precrisis (3Q08) levels, consumption in Asia is up by 18%."
- "Eighteen percent? Hold on a minute. This is Asia – the place that everyone said had to consume more. The place that could only save and could only export. The place that could not possibly grow unless the US was growing because the US was doing all the buying."
- "Yet there it is. Zero buying in the US. Zero buying in Japan and in Europe. And a boatload of buying in Asia. It’s the immaculate recovery – the thing that everyone said could never happen. The pregnant Asian shopper standing next to an utterly superfluous US, JP and EU."
- "That’s why Asia’s central banks will be back in tightening mode soon – because Asia’s recovery is not about the US. It’s about Asia. And there’s nothing fishy and certainly nothing religious going on here. The hard fact and simple arithmetic (that we’ve shown regularly over the past 4-5 years) is that Asia has been growing rapidly for years and, after a few decades, it adds up: Asia is no longer too small to matter. Among other things, this means Asia can and will consume whether the G3 does or not. And it means Asia’s monetary policies will depend more on what happens here in Asia and less on what happens elsewhere in the world."
- "Still, something doesn’t add up. Much of this report (below) argues that Asia is finally starting to slow down. If so, why will central banks start hiking again?"
- "Because Asia’s slowdown is being driven – or, rather, constrained – by the supply side, not by a slowdown in demand. Asia’s V-shaped recovery and double-digit GDP growth over the past 4-5 quarters have exhausted the excess capacity that used to exist. When that happens, output growth starts to fall and inflation starts to rise."
- "Asia may be slowing on the margin but central banks will have a tougher time dealing with inflation, not an easier time. And if the Fed (counter to expectations) goes ahead with QE2, Asia’s tightening will become all the more difficult. And all the more ‘ironic’."

DBS Economics Markets Strategy 2010Q4

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