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Asia Economic Outlook: China Lifts All Boats

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Asia Economic Outlook: China Lifts All Boats

by Glenn Levine, Moody's Analytics, 10 October 2011
topics:
Risk Management
tags:
Association of Southeast Asian Nations China economic outlook India Japan soft landing
  • Asia's low risk profile leaves it well insulated from the financial troubles unfolding in Europe
  • Real economic activity is supported by continued strength in the Chinese economy
  • China appears headed towards a soft landing, though there are risks
  • Japan's auto sector has recovered nicely, but manufacturers face headwinds that will impede growth in 2012
 
The Asia-Pacific economies will continue to grow solidly across the medium term, as countries are largely insulated from Europe’s financial turmoil. Real activity is increasingly driven by China, which is headed for a soft landing in 2012.
 
Most economies have slowed in the second half of 2011 as tighter domestic monetary conditions take hold and against a background of softening global demand. The slowdown will run through the first half of 2012 before a stronger recovery emerges. This outlook has downside risks, but we remain confident that Asia’s strong recent performance will continue.
 
Low risk exposure
Asia escaped the 2008-2009 global financial crisis with a few cuts and bruises, and most economies have grown slightly above trend. Low risk exposure insulates most economies from the financial contagion that has hit the region in the past.
 
Governments have large stockpiles of foreign reserves; many run a current account surplus; banks tend to be conservative and domestically focused, with little exposure to the West's travails; and, most important in light of recent events, Asian governments have little fiscal risk, with low public debt and small budget deficits.
 
Policymakers learnt the lessons from the 1997-1998 Asian financial crisis. Most now have ample foreign reserves to defend their currencies and, as in 2008, are well prepared to weather another round of financial turbulence. The risk of capital flight remains low and credit markets are functioning well.
 
We do not expect financial contagion in Asia from Europe’s current dramas. 
 
 
Some real economy effects
The main fallout in Asia from recent global ructions will be in the real economy. We have revised down our US and euro zone growth forecasts, with the slowdown expected to run until at least mid-2012. This has implications for trade-dependent Asia.
 
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