Japan’s Mount Fuji seen on the Tokyo skyline on January 1, 2011.
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Asia’s growth is set to overtake by the end of the year in the US and Europe as the region was largely spared interest rate shocks, Morgan Stanley said.
“We think that by the fourth quarter of this year, growth in Asia will outperform the US 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 US published the May inflation print.
Citing reasons for his optimism, he said Asia is expected to deliver a healthier growth rate while the West will lag behind. In addition, a large-scale recovery in China could come in the second half of this year, while the big three Asian economies – India, Indonesia and Japan – are also showing strong domestic demand.
“We certainly expect growth in those two economies to be constrained by the fact that they have this significant inflation problem,” Ahya said, referring to the US and Europe.
Central banks in these markets need to move key rates into restrictive territory to get inflation under control, he added.
“Asia hasn’t experienced the interest rate shock that the US and Europe have,” he said, adding that inflation in Asia is almost half that of the other two regions.
The US inflation rate remains 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 The Federal Reserve skipped a rate hike this week as the fight against inflation has shown promise.
Just last month, the central bank made the 10th increase in interest rates in a row in more than a year, designation the fastest tightening of monetary policy The Fed has been committed since the 1980s.
Similarly, in Europe, inflation in the eurozone fell to 6.1% in May.which is the lowest level since February 2022. The ECB raised its benchmark rates from -0.5% a year ago to 3.25% in Maywhich is the most since November 2008.
“The inflation problem in Asia has not been as intense. And we think inflation in the region has peaked,” he said. “By the time we are in September [or] October, 80%. [the] in the countries of the region, inflation would return to the comfort zone of the central banks.”
Central banks in Asia that hit the brakes on interest rates include South Korea, Australia, India, Indonesia and Singapore.
Another engine of growth in Asia is the expected recovery of China in the second half of the year.
“We expect China’s recovery to expand in the second half of this year,” Ahya said. The bank forecasts the superpower to grow at 5.7% in 2023, up from 3% last year.
“We think the recovery in consumption in China is largely on track,” he said. According to him, this will certainly bring a positive spillover to other parts of the region.
A skyscraper in Jakarta, Indonesia on June 10, 2023. Indonesia’s implementation of orthodox macro policies has also structurally reduced the Southeast Asian nation’s inflation.
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Ahya said that in the next three months or so, China’s markets should see a good level of spending.
The bank also expects the Chinese government to announce further stimulus measures in the form of easing purchases in the real estate sector, as well as providing an infrastructure financing program worth around trillions of dollars.
China cut its key interest rate on Thursday, cutting interest rates one-year medium-term lending facility (MLF) by 10 basis points. On Tuesday, The People’s Bank of China cut the seven-day reverse repo ratetype of short-term borrowing interest rate, from 2% to 1.9%.
The region’s overall growth rate is also supported by India, Indonesia and Japan, which have their own domestic demand recovery cycles.
“India has also been implementing structural reforms over the last five years … which are pushing private investment upwards,” Ahya said.
He predicted India’s growth to reach 6.5% in 2023. beat the International Monetary Fund’s forecast by 5.9% until 2023.
Indonesia’s implementation of orthodox macro policies has also structurally reduced the Southeast Asian nation’s inflation, the economist said, attributing this to the government’s commitment to keeping the fiscal deficit below 3%. This has resulted in Indonesia’s public debt-to-GDP ratio being one of the lowest in the emerging market space at under 40%, he said.
Morgan Stanley believes that Japan is in a “sweet spot” where it is leaving deflation behind, but does not have the same acute inflation problems as the US and Europe.
“That creates an environment where the economic machine works.”
—CNBC’s Jihye Lee contributed to this report.