International | Jun 13 2008
By Chris Shaw
According to DBS, a reasonable expectation for Asian economic growth is
something in the order of 7% annually, assuming conditions are not too
bad. It is this assumption that makes recent performance interesting as
the group notes growth in the region has been solid (driven largely by China and India) yet conditions have been far from ideal given weakness in the US economy and a tripling in oil prices over the past three years.
The reason growth has remained strong in the group’s view is the
strength of Asian demand as this has been enough to support growth,
while at the same time the region has survived the increase in
the oil price as it has been regional demand that has driven
the oil price higher.
It is the latter that is somewhat surprising as the group points out
Asia is home to six of the world’s 14 largest oil importers, with
China, India, Korea and Taiwan in the top 10, meaning the higher oil
price should be creating something of a disaster scenario.
Yet the opposite is happening and growth remains strong, with a perfect
example being Singapore’s 6.7% year-on-year growth in the first
quarter, which is faster than the growth it achieved three years ago
when US growth was running at around 4% year-on-year and oil was
one-third its present level.
And it doesn’t stop there, DBS pointing out Hong Kong has done even
better and China and India have powered along, results that are turning
traditional thinking on their head as the region’s current role is far different than what used to be the case.
More and more it is Asia that is proving the world’s incremental demand
growth and this is what is driving global economic growth. It is the
same story in oil, where the group notes Asia is the biggest driver of
oil demand and it is this and not supply contraints that are pushing up
the oil price.
This means when attempting to measure the cost to economic growth of
higher oil prices a traditional line of analysis will prove to be
wrong, as traditionally an oil crisis is thought to be the result of
supply side issues and not one driven by strengthening demand.
It also explains why the Asian region has been able to ride out the storm of the oil price surge, as higher prices from strong demand are paid for when they are incurred, but a supply side shock is something that impacts after the fact and has a more measurable cost.
The other point is Asia is no longer “too small to matter” as the
region has grown by 50% over the past five years, meaning Asia now
generates almost as much new demand for the global economy as the US
does, compared to the US generating double the amount back in 1990.
Equally important in the group’s view is the fact while the oil deficit
as a proportion of GDP has widened in the Asian region as oil prices
have risen, current account deficits haven’t, which means the dynamic
gains to the economies in the region of higher and stronger growth are
not being impacted by the higher oil price, which is allowing Asia to
continue to record such strong growth.
The other positive is countries in the region are becoming much more
efficient in their oil usage, meaning their price of oil is being
lowered in real terms, allowing them to get the most out of
the growth in global demand of recent years.
So does this mean the future for global growth is bright despite higher
oil prices? Well, not exactly is DBS’s answer, as inflation is becoming
an increasing issue for the G3 in particular, but addressing the issue
means determining what level of inflation is acceptable.
In Asia the group notes an inflation rate of between 4-8% is considered
ok, but for the US and Europe to achieve their inflation targets of closer to 2% it will require a sacrificing of growth as interest rates will have to be lifted to bring inflation under control.
This does complicate the global outlook in the group’s view as attempts
to fight inflation in the US and Europe will lower domestic growth rates in both economies, making any fight against rising inflation may be an ugly one until both realise they can’t win such a battle and more or less accept higher inflation as a consequence of the global growth being driven by Asian demand.
To play such an environment the group suggests market exposure should
be centred on the developed markets of Singapore, Taiwan, Hong Kong and
Korea as here the downside risks to economic growth are lower given
emerging markets run an increased risk of policy mistakes.
In terms of aset allocation DBS is currently overweight Singapore,
Taiwan and China, while taking benchmark weight positions in Hong Kong
and Korea and being underweight Malaysia, Thailand, Indonesia and India.
