China’s economy grows 4.5% faster than expected
Growth in Asia is expected to outpace that of the U.S. and Europe by the end of the year, Morgan Stanley said, as the region has largely shunned interest rate shocks.
“By the fourth quarter of this year, we believe growth in Asia will outpace the U.S. and Europe by about 450 basis points,” Chetan Ahiya, the investment bank’s chief Asia economist, said in a webinar.
He cited reasons for optimism, saying Asia was poised to post healthy growth while the West would lag behind. In addition, China’s full recovery is likely to come in the second half of this year, while the three largest economies in Asia – India, Indonesia and Japan – are on the rise. Domestic demand is also strong.
Asian inflation ‘not dramatic’
“We certainly expect growth in both economies to be constrained by serious inflation problems,” Ahiah said, referring to the U.S. and Europe.
Central banks in the U.S. and Europe should move interest rates into “no-go zones” to keep inflation in check, he said.
Meanwhile, Ahya said Asia has not experienced the rate shocks experienced by the U.S. and Europe, and its inflation rate is close to half that of the other two regions.
Inflation in the US has been holding steady above the Fed’s 2% annual target.
Inflation slowed to 4% in May, the lowest level in two years, after peaking at 9.1% last June. After raising interest rates 10 times in a row starting in March 2022, the Federal Reserve stopped raising interest rates this week and decided to keep interest rates in the range of 5-5.25%.
The story was similar in Europe, where inflation in the euro zone fell to 6.1% in May, the lowest since February 2022. The ECB raised its borrowing rate to 3.5%, the highest level in 22 years, from -0.5% a year ago.
“Inflation in Asia is not a serious problem. We think inflation in the region has peaked…By September or October, 80% of countries in the region have seen inflation move back into central bank comfort zones.” According to Morgan Stanley said.
Central banks in Asia, including South Korea, Australia, India, Indonesia and Singapore, have cut interest rates.
China..host
Another driver of growth in Asia is China’s expected recovery in the second half of the year.
“We expect China’s recovery to expand in the second half of the year,” Ahiya said. The bank expects China’s economic growth to reach 5.7% in 2023, compared with 3% last year.
“We think the consumption recovery in China is very much on the right track,” he said, adding that it would also lead to positive spreads elsewhere in the region.
China’s May inflation data rose 0.2% year-on-year, and producer prices fell 4.6%, the largest annual decline in seven years.
Ahiya said China will see good levels of spending over the next three months.
The U.S. bank also expects the Chinese government to announce more stimulus measures, including easing property purchases and launching a $1 trillion infrastructure financing plan.
India, Indonesia and Japan
The region’s overall growth rate is also being supported by India, Indonesia and Japan, which are enjoying their respective buoyant domestic demand cycles.
“India has also been implementing structural reforms for the past five years,” Ahsia said, “and this is driving private investment.”
He forecasts India’s growth rate of 6.5% in 2023, replacing the International Monetary Fund’s 5.9% forecast for 2023.
The economist said Indonesia’s implementation of conventional macroeconomic policies had also structurally lowered inflation in the Southeast Asian nation, which he attributed to the government’s commitment to keeping the fiscal deficit below 3 percent. That has left Indonesia with a public debt-to-GDP ratio of less than 40 percent, one of the lowest among emerging markets, he said.
According to Morgan Stanley, Japan is in a “good position” to emerge from deflation, but without the severe inflation problems seen in the U.S. and Europe.