While the growing downside risks for advanced economies grow, Asia’s economic data has been holding up relatively well, with resilient domestic demand and a surprisingly strong bounce. The primary conduit in which Asia will be affected is the export-driven economies.
The July export growth numbers released so far by three countries – China (+20.4% year-over-year), Korea (+27.3%) and Taiwan (+17.6%) – all significantly exceeded expectations, indicating a sharper month-over-month acceleration of final demand and was consistent with the earlier view that some of the temporary drags to final demand – Japan supply disruption and previously higher gas prices – were reversing. Beyond this, domestic demand conditions in the region remained strong, as seen in the 2Q Real GDP figures in China, Indonesia and Singapore, the robust labor market and retail sales data in Hong Kong, Korea, Singapore and only moderate slowdown in IP, FAI and retail sales in China.
If US and Europe growth suffers more than expected, Asia’s growth will be impacted in varying degrees, we think primarily via the trade channel. Growth of Asia’s more externally dependent economies are likely going to be more vulnerable – Singapore, Taiwan, Thailand, Hong Kong, Malaysia and even Korea look more exposed. In the past week, we have downgraded our growth forecast this year for Singapore (from 7% to 5.7%), Malaysia (5% from 5.7%), Korea (3.9% from 4.3%) and Philippines (4.0% from 4.6%) – growth forecasts in Taiwan and Hong Kong could still be vulnerable, while our Thailand growth forecast this year is already well below consensus (at 3.6%). There is still a high degree of uncertainty to our forecasts given the evolving situation in the developed markets.
On the positive front, the correction in commodity prices, particularly oil, should be a net positive windfall for most of Asia not only in terms of trade (Malaysia is the exception) but also eases constraints on monetary policy by alleviating pressures on inflation. We think this is particularly important in countries like India where RBI has hiked most aggressively (325bps and 375bps on reverse repo/repo rate, respectively), fuel subsidies are being cut and the fuel weight in the WPI basket is particularly high.
The emerging market equity prices have statistically significant spillover wealth effects from stock market volatility, though the impact is smaller than advanced economies, and within emerging markets, is larger for countries with more developed financial markets and larger for EM Asia than in Latam.2 Intuitively, Singapore, HK and Korea are likely, at the margin, more vulnerable, than countries like China and Indonesia. However, consumption is far more sensitive to wage/income growth than asset prices, and to the extent that labor markets in Asia have not been affected so far (especially in the case of Singapore, Korea and HK where unemployment rates remain historically low at 2.1%, 3.3% and 3.5% respectively), this...