Asia bracing for a slow, grinding recovery: BBVA

HONG KONG - GDP growth slowed across most Asian economies in Q1 2015 as a pullback in Government spending, subdued domestic demand and negative exports growth offset a gradually improving investment outlook. BBVA Bank says in a new report that  sluggish economic activity has prompted authorities to loosen monetary policy through May, with more easing measures in the pipeline.

“On the other hand, elevated debt levels in some Asian countries have made them increasingly vulnerable to an abrupt change in US monetary policy and accompanying capital flight,” BBVA says.

“The challenging backdrop warrants Asian authorities to 1) expedite structural reforms, 2) introduce micro as well macro prudential measures to mitigate liquidity risks emanating from high leverage, and 3) step up efforts to correct twin deficit concerns on the fiscal and current account.”

Growth deceleration is prevalent in the region with only a few exceptions, the report says. “The downtrend was led by China, which grew 7.0% y/y in Q1 from 7.3% in the previous quarter, its slowest pace since Q1 2009, raising expectations of more aggressive policy easing through certain QE-like measures.

“Prima facie, India beat China’s pace of growth, as it clocked 7.5% y/y during the period, However, India’s headline GDP outturn masked significant weakness under the hood. Excluding volatile net indirect tax receipts, India's Q1 GDP growth slowed to 6.1% y/y from 6.8% in 4Q14. Furthermore, most high frequency domestic activity indicators such as credit growth, IP, freight traffic and vehicle sales; remain subdued while Q1 corporate earnings have disappointed.

“Elsewhere, GDP growth decelerated significantly in Indonesia (4.7% in 1Q15 vs. 5.0% in 4Q14), in the Philippines (5.2% vs. 6.6%), and to a lesser extent in Korea (2.4% vs. 2.7%), Malaysia (5.6% vs. 5.7%), Hong Kong (2.1% vs. 2.4%) and Taiwan (3.4% vs. 3.5%). The brighter spots in the region include Japan (2.4% vs. 1.1%), Thailand (3.0% vs. 2.1%) and Singapore (2.6% vs. 2.1%), although the pick-up in Japan was largely led by inventory adjustments.

“The spectrum for further rate cuts across Asia has narrowed, but sharper growth deceleration could prod Central banks to act.

“Apart from potential changes in Fed’s monetary policy, domestic macro and financial stability and exchange rate movements will continue to play a vital role in future rate decisions across Asia.

“For India, Indonesia, Philippines Thailand, and Korea, the risk-reward is in favour of their central banks staying on hold throughout 2015, although we do expect a final 25 bps rate cut by the RBI later this week followed by a long pause. Uncertainty over monsoon rains and the impact on inflation would play a key role in RBI’s policy decisions looking ahead while Bank Indonesia needs to strike a delicate balance between supporting growth and stemming macro-stability and exchange rate risks.

“Meanwhile we expect significant policy easing through fiscal, monetary and unconventional channels by China over the coming months.”
 
BBVA adds that Asia’s debt pileup undermines the regions resilience against global liquidity shocks.

“Divergent monetary policy cycles across the Atlantic, given the imminent US monetary policy normalisation, Europe’s open ended QE and China’s probable QE-like measures, alongside lingering geopolitical conflicts have left capital markets vulnerable to bouts of illiquidity, in turn exacerbating financial stability risks for emerging Asia.

“High debt levels in the region are a weak link for external vulnerability despite overall improvement in financial stability indicators for Asian economies, since the Fed's QE taper tantrum in May 2013.

“Although still at moderate levels compared to Japan, China’s debt accumulation has been the most rapid across Asia since 2007, up 83 percentage points to 217% of GDP.

“Asia's debt binge is heterogeneous across countries, meaning that it has played out differently – China, Indonesia and Korea has seen a pick-up in corporate debt, Malaysia and Japan have seen higher Government debt while Thailand has seen larger household debt.” www.bbvaresearch.com (ATI).