John Greenwood, Invesco chief economist, says in his latest quartely outlook that the economies of emerging Asia and Latin America will provide the strongest growth.
China and non-Japan Asia
Following the National People’s Congress in March, China has recently completed a leadership change with Xi Jinping becoming President of the Republic, General Secretary of the Communist Party and Head of the Military Commission, and Li Keqiang taking over as Premier with responsibility for economic policy. So far the leadership has indicated that continuity and stability will be their watchwords, but in reality there is a huge agenda that needs to be addressed.
Last year the Chinese economy slowed much more than the official figures suggested under the impact of both domestic and external factors. On one level the policy response was held back by the leadership change, and decisions were understandably cautious rather than substantial. On another level the policy options have been constrained by the unintended results of the 2008-09 stimulus programme – a property bubble and CPI inflation of 6.5%. Indeed, the authorities are still imposing new administrative restrictions in an effort to combat the unwelcome spike in property prices. Moreover, even though normal bank lending has largely been brought under control, “shadow bank” lending or loans from non-bank financial organisations including property-related trust management entities are still rampant, growing at over 35% year-on-year in the December quarter. It therefore makes no sense for the Chinese authorities to ease monetary conditions in the official bank sector at present.
On the external side exports have started to recover modestly from the slump of last summer and autumn, but China’s extreme concentration on exports and fixed capital investment – both areas that are being hard hit by the subpar growth in the US and the recession in the eurozone – makes a rapid turnaround difficult in the face of weak global demand. The currency has been held broadly stable in the range 6.20-6.40 against the US$ over the past 15 months, but what China really needs is more ambitious liberalisation of capital flows as well as a faster pace of domestic interest rate deregulation. Unfortunately neither of these two objectives is likely to be tackled vigorously by the new leaders. These constraints on deregulation as well as the slow growth of China’s key export markets imply that growth in 2013 will be little better than last year’s 7.5%.
On the inflation front there is no danger of a runaway surge in China’s general price level since broad money and credit remain basically under control, even though the authorities remain acutely sensitive about upswings in property prices, and there are liable to be further episodes of food price inflation. I expect overall CPI inflation to be about 2% for the year as a whole.
The picture for the rest of non-Japan Asia outside China is broadly similar to China’s outlook – constrained by continued weakness of key export markets and by their inability or unwillingness to pump-prime too much at home. In Korea and Taiwan domestic demand is much weaker than in past business upswings, whereas in the ASEAN region conditions are more buoyant but the authorities are wary of allowing too much credit easing. Only in Indonesia is credit growth clearly excessive. Nevertheless, several economies have cut interest rates and eased credit conditions in order to try to offset the external slowdown, but these measures alone will not be sufficient to reverse the global trend toward slower growth and lower inflation.