Asia‘s emerging-market growth engines appear to be downshifting in the face of rising inflation and interest-rate increases.
One of the strongest recent indications of slowing expansion came Tuesday when India announced its economy grew 7.8% in the January-through-March period from a year earlier, compared with 9.4% in the same quarter last year and slower than the 8.3% rate in the last three months of 2010. While still robust, that was less than economists expected and below 8% for the first time since the end of 2009. The decline in expansion was driven by a sharp fall in investment and the slowest increase in the services sector in several years, raising doubts that India will achieve the 10% growth rate the government has targeted anytime soon.
“The omens for Indian GDP growth are not particularly good” said Robert Prior-Wandesforde, economist for Credit Suisse. Despite the deceleration, he expects India to continue its course of interest-rate increases aimed at taming inflation, which hit 8.7% in April compared with a year earlier. He figures growth for both the current fiscal year and the next—ending almost two years from now on March 31, 2013—will be only 7.5% compared with 8.5% in the recently-ended fiscal year.
South Korea, meanwhile, said Wednesday its consumer-price inflation slowed for the second straight month in May, but core inflation accelerated to a two-year high.
In May, the consumer price index rose 4.1% from a year earlier, easing from the preceding month’s 4.2% rise. The gain was lower than the 4.2% increase forecast by economists polled by Dow Jones Newswires. Core inflation, which strips out volatile energy and agricultural prices, accelerated to 3.5% from 3.2% in the preceding month, compared to a year earlier.
On Tuesday, South Korea, considered a bellwether for global manufacturing and trade, said industrial production unexpectedly contracted in April by a seasonally adjusted 1.5% compared with March. A decline in production of domestic household goods such as furniture contributed to the decline in output numbers. A rise in company inventories combined with a decline in shipments to customers points to a further slowdown in the months to come.
The question is whether the slowdown is a temporary breather in the world’s fastest-growing region, providing the “soft landing” policy makers have sought amid inflation fears, or the beginning of a more prolonged slump, an outcome most forecasters are discounting for now.
The negative data adds to jitters that what looked like a robust global recovery late last year is waning. In China, growth in manufacturing activity has slowed in recent months as the government tamps down on bank lending and lifts interest rates to fight inflation. On Wednesday, China said its official Purchasing Managers Index fell to 52.0 in May from 52.9 in April.
The U.S. economy has grown less quickly than economists predicted while Europe remains preoccupied with resolving the debt crisis in Greece.
Tuesday’s numbers fill in a picture of decelerating expansion across Asia. After two years of record automobile sales, for instance, growth has slowed. In the largest car markets, China and India, government-buying incentives expired and interest rates have risen, dampening demand. That will in turn put a drag on manufacturing as higher inventories of unsold cars cause auto makers to cut back production, according to Rahul Bajoria, economist for Barclays Capital.
So far, however, signs of economic cooling are moderate. And in the case of rapidly expanding emerging economies, the moderation can be seen as a positive in the effort to get inflation, the main economic bugaboo, under control. It shows that these economies are responding to deliberate efforts by policy makers to slow growth by raising interest rates, tightening bank lending and letting currencies rise.
“I’m pretty confident this is a soft landing,” said Frederic Neumann, Asia economist for HSBC in Hong Kong. “The bottom is not falling out. Despite the slowdown in industrial activity, the fundamental drivers of global recovery are in place,” he said. He attributes part of the slowdown to the cyclical ebbs and flows of the corporate inventory cycle. Businesses produced too many goods in late 2010 and are now facing oversupply, so have cut back production. But underlying demand will remain healthy as long as labor markets continue to improve.
In South Korea, the economy is still expected to expand smartly this year thanks to robust exports. Yet pockets of weakness are emerging and some economists have revised back their forecasts for how quickly the Bank of Korea will raise interest rates in the coming months.
“This April is the worst,” said Cho Kwang-bok, owner of Dunlop Bed, a shop in southern Seoul. Spring is usually his peak time because it’s the Korean wedding season. “If there are 10 prospective customers out there, I think only three people actually visit our store to buy furniture. Worse yet, these customers look for something cheap,” he said.
Complicating the economic picture has been the disruption in manufacturing supplies caused by the natural and nuclear disasters in Japan. Export data from places such as Singapore and Hong Kong were weak in April as Japanese-made parts for automobiles and electronics ran short. Japan reported Tuesday its industrial production expanded 1% in April , less than expected, though manufacturers surveyed show Japan’s production will rebound strongly in future months as it turns from recovery to rebuilding. Most economists expect Japan’s economy to expand in the second half of the year, giving a boost to global manufacturing and commodity producers to help supply the reconstruction.
The biggest concern in Asia remains inflation. Rising prices, if left unchecked, crimp consumer spending and make businesses less willing to invest. Economists expect the Reserve Bank of India to continue to raise interest rates until there are more concrete signs inflation is under control.
Santara, a 45-year-old housewife in New Delhi who goes by only one name, said she has been bearing the brunt of inflation for the last several months. She supports her family of four with a monthly income of 2,500 rupees ($55.50) as a part-time cleaner at a hotel. “Everything has become so expensive that we now afford to eat only dal roti”—staple Indian foods consisting of lentils and flat bread—she said. ” Even having tea is difficult because prices of sugar and milk have gone up.”
Alex Frangos – WSJ