Research Blog
Growth in Asia rapidly losing momentum
For more details, please contact:
Mingchun Sun
(852) 2773 8751
mingchun.sun@hk.daiwacm.com
Kevin Lai
(852) 2848 4926
kevin.lai@hk.daiwacm.com
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1 December 2011
Summary
- Growth momentum in the Asian region is waning rapidly.
- In India, slowing growth has raised the chances of rate cuts early next year.
- The Bank of Thailand's (BOT) 25bp rate cut looks set to be followed by more.
Indian GDP slows. Odds of rate cut rising
India’s real GDP growth slowed further from 7.7% YoY in Q1 FY11/12 to 6.9% YoY in Q2, in line with consensus. Domestic demand continued to lead this slowdown on the back of inflation pressure, policy tightening and a deteriorating domestic investment climate. Investment growth plunged from 7.9% to -0.6% YoY, while private consumption weakened from 6.3% to 5.9%. As a result, the growth contribution from domestic demand fell from 7.7 ppt to 4.5 ppt.
External demand, on the other hand, held up pretty well, with export growth actually picking up from 24.3% to 27.4% YoY. Domestic weaknesses caused import growth to slow sharply from 23.6% to 10.9% YoY. As a result, the growth contribution from net exports jumped from -1.7 ppt to 2.7 ppt, providing a significant boost to GDP growth.
Looking ahead, we doubt that exports can hold up for long in this increasingly hostile global backdrop. Domestic demand has clearly turned decisively weaker than in our previous assessment and a near-term rebound looks unlikely now. GDP growth was 7.3% YoY for H1 FY11/12. As a result, we have revised down our GDP forecast for FY11/12 as a whole from 7.9% to 7.0%. This compares with a 7.6% consensus. We expect the RBI to keep the policy rate on hold at the next MPC meeting on 16 December, but see a chance of easing in its meetings in Q112.
India’s slowdown well underway
Source: CEIC and Daiwa
Thailand cuts rates, with more to come
A 25-bp rate cut of the policy rate, to 3.25%, did not come as a surprise, as the economy battles with the damage from the floods domestically and rising macro headwinds externally. Against this background, the BOT’s Business Sentiment Index plunged from 48.5 in September to 36.7 in October, its lowest level since January 2009. Meanwhile, core CPI remains tame at 2.89% YoY, still within the BOT’s target of 0.5-3.0%, despite price pressures from the floods. We expect another 25bp rate cut at the next MPC meeting on 25 January 2012.
Thailand’s Business Sentiment Index
Source: CEIC and Daiwa
Hong Kong’s broad money plunges
Last but not least, liquidity is clearly drying up fast in Hong Kong, with narrow money (M1) and broad money (M3) contracting by 9.8% and 3.8% YoY respectively in October, the largest falls since November 2008. These contractions were driven by a 5.5% YoY decline in HKD deposits (while foreign currency deposits jumped 20.2% YoY), providing further solid evidence of liquidity flows out of Hong Kong in response to the end of QE2 and growing global macro concerns, something we have been warning relentlessly about since April.
Money in Hong Kong: Drying up
Source: CEIC and Daiwa
Mingchun Sun, Chief economist, Asia, ex-Japan
Kevin Lai, Senior economist, Asia, ex-Japan
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