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Asian economies may have peaked

Rising inflationary pressure and interest rates spooked investors in May, leading to a rapid sell-off in emerging market stocks, bonds and currencies.

india Updated: Jun 01, 2006 12:55 IST

Asia's economic powerhouses, which have pushed commodity prices and regional stocks to record highs, may have spewed out some of their best growth numbers for the current four-year expansion phase during the first quarter.

But India and the resurgent export powerhouses South Korea, Taiwan, Hong Kong and Singapore are unlikely to be able to sustain such growth in coming quarters as soaring energy and commodity prices dampen consumption and stoke inflation, forcing central banks to raise the cost of money, analysts said.

China, where annual growth in investment spending accelerated to almost 28 per cent in the first quarter after a 25.7 per cent growth in all of 2005, could be the sole exception as money for factories, roads and ports continued to pour in, they said.

Demand from the US economy, which has powered much of the current phase of Asian expansion that followed the deadly SARS outbreak in 2002, is also set to sputter as high fuel prices and falling property prices hit personal consumption.

"The best is behind us. First quarter would have been the peak," said Arjuna Mahendran, chief economist for Asia at the private banking arm of Credit Suisse in Singapore.

"There will be a pause in the US economy in the third quarter. That will have ramifications for Asia."

India's economy in the January-March quarter grew a stronger-than-expected 9.3 per cent from a year earlier, helped by strong manufacturing and farm output, data showed this week.

Mahendran said the figures meant the Reserve Bank of India was certain to raise interest rates in July and October.

China's economy was running at an annual rate of 10.3 per cent in the first quarter, raising expectations the central bank would tighten monetary policy through bank reserve requirements.

First-quarter growth figures from Singapore, Hong Kong and South Korea, which rely heavily on trade, also beat analysts' forecasts.

Buckling under pressure

Signs of a slowdown in Southeast Asia are already apparent as energy costs and interest rates rise.

The Philippines said this week economic growth crawled at just 0.9 per cent in the first quarter, on a seasonally adjusted basis, slowing from a pace of 1.4 percent in the fourth quarter.

Indonesia, which doesn't report adjusted figures, said annual first-quarter growth slowed in the first quarter to its weakest pace since 2004.

Next week, Thailand is expected to report that seasonally adjusted GDP rose in the first-quarter at its slowest pace in a year as consumption weakened partly owing to a political crisis that has delayed a multi-billion dollar government spending programme.

Malaysia, which reported annual growth of 5.3 per cent in the first quarter, said that while it expects growth to stay above 5 per cent in coming quarters, inflation was likely to average 3.5-4.0 per cent.

That means the benchmark interest rate of 3.5 per cent is below a "neutral" level, Malaysia's central bank chief Zeti Akhtar Aziz said, adding it was vital not to have significantly negative real interest rates for a prolonged period.

Full-year forecasts intact

Rising inflationary pressure and interest rates spooked investors in May, leading to a rapid sell-off in emerging market stocks, bonds and currencies.

In India, more than $100 billion was wiped off stock values within a couple of weeks as the benchmark index plunged about 20 per cent from a record high hit on May 11.

Indonesian stocks and the rupiah also took a beating along with emerging markets in Eastern Europe and South America.

But the future is not all doom and gloom. Despite expectations for a slowdown, most analysts have maintained their full-year growth forecasts for Asia.

"We continue to think the world economy is in solid shape, with growth in Japan, China and Europe offsetting a likely slowdown in the US in the second half," Goldman Sachs said in a report on Wednesday.

Jimmy Koh, head of economy and treasury research at Singapore's United Overseas Bank, said Asian economies were likely to grow through 2006 and 2007 with inflation largely under control.

Besides, Asian stock markets have had net capital inflows so far this year despite the sell-off in May, he said.

"Once the dust settles, focus is likely to be shifted back to the still stable Asian economic fundamentals and signs of more renminbi moves," Koh said, referring to expectations that China would continue to let its currency gradually strengthen.