International | Oct 03 2006
By Greg Peel
The US housing market slump has claimed another victim, with HSBC economists slashing their US 2007 GDP growth number from 2.6% to 1.9%. Given the global dichotomy of Asia as the centre of manufacturing, and the US as the centre of spending, the economists have reassessed their growth forecasts for the Asian region.
In analysing the impact, HSBC took into account direct exposure of Asian countries to the US economy, as well as interactive effects within the region. The economists also considered each country’s macroeconomic policy flexibility.
On a purchasing power parity basis, the economists have cut the region’s total growth by 0.2% to now be below consensus. However, they note that GDP impacts are expected to vary greatly amongst countries. The large, closed economies of China, India and Japan will not suffer as greatly as the small, open economies of Hong Kong, Singapore and Taiwan.
HSBC further predicts that a round of rate cutting is imminent in Asia. This will benefit the yen and renminbi but adversely affect the Indonesian rupiah, Korean won and Taiwan dollar.
HSBC has outlined its views on a case by case basis.
China is still “hot”. With industrial output continuing to grow at a rapid pace the pressure is on the government to tighten further, so China will likely persist with interest rate rises. However, the economists see the situation reversing later next year as the impacts of a US slowing flow through to the substantial manufacturing industry.
Government revenue has been growing at 25% pa or twice that of the GDP, so HSBC suggests government spending on rural infrastructure, health and education will soften the economic blow. Investment also remains strong. The economists are factoring in 8.5% GDP growth for 2007, down from the 10% level of the past three years.
Domestic demand in Hong Kong is firing along as cautiousness gives way to confidence, HSBC notes. While a US slowdown will impact, domestic demand should provide a buffer.
India has put in its best ever performance over the last four years, averaging 7.35% GDP growth. HSBC sees this gaining speed, and are tipping 8.5% growth for 2006-07. Industrial output has offset an agricultural sector weakened by changing weather patterns. As the government has indicated its vigilance against inflation, HSBC expects a rate rise before year end. However, that will likely be the peak.
Indonesian government spending jumped a massive 35% in the second quarter and is expected to keep growing despite tighter monetary conditions. Indonesia will be impacted by a US slowdown to some extent but also by a stronger rupiah. HSBC sees GDP growth dropping from 5.1% to 4.8%.
HSBC expects Korea to raise rates one more time before falling consumption leads to monetary easing in 2007. Growth was up 5.3% in the second quarter but the economists expect a slowdown from here.
The Malaysian government is determined its economy should grow, and is projecting 6% for 2007. It is likely to be disappointed, suggests HSBC, as Malaysia has a high proportion of exports flowing directly to the US. The economists believe Bank Negara has finished raising rates, and will be looking to ease in 2007.
The Philippines continues to grow briskly, but HSBC expects a significant softening of exports in 2007.
Singapore growth has softened from 10.8% to 8.1% from the first quarter to the second, and will continue to soften, HSBC suggests. Rate cuts are expected next year.
Taiwan is also expected to slow, but policy decisions will be more difficult given the country’s tardiness in raising rates to date.
HSBC expects the Bank of Thailand to bring forward its intended rate cut to the fourth quarter this year, due to the coup. Otherwise the economy is holding up rather well in spite of some political uncertainty.
