Inflation will continue to be a worry in Asia, says Dong Tao, chief economist for non-Japan Asia at Credit Suisse.
"Asia is joining the rest of the world in facing tremendous inflation problems," says Tao, who notes that inflation will persist in the region even if oil prices stabilise. After all, food is a major driver of inflation in Asia, especially in the southeast.
Tao doesn't expect Asian central banks to significantly tighten monetary policy to help curb consumer prices because they are too worried about the impact of high interest rate on exports. "They will likely take a wait-and-see attitude," he says.
Amid this backdrop for the region, Tao expects the growth risks in China to be moderate. Credit Suisse has raised its GDP growth forecast for non-Japan Asia to 7.9% from 7.7% for 2008, largely due to an upward revision in China. It revised its 2008 forecast for China to 10.1% from 9.7%, reflecting better net trade.
Economic growth in China has been better than the market may have expected, Tao says, and GDP growth momentum will be sustained in spite of the credit crisis, high oil prices and the recent natural disaster.
Tao also believes food price inflation should decline on a yearly basis over the next two quarters in the mainland, thanks to a rising statistical base and better supply, but remains cautious on the inflation outlook for next year. With headline inflation softening, growth risk moderating, he expects a period of relatively tolerant economic policies in China, which he calls "the Olympics honeymoon".
Although the impact of rising oil prices on the Chinese economy remains relatively small, Tao notes that the risk to growth posed by energy costs is increasing. China fixes domestic gasoline and diesel prices at around 40% below the international benchmark, which has protected consumers but caused losses for refineries, even in spite of the subsidies and tax rebates offered on an ad hoc basis.
In Hong Kong, Tao expects that crude oil prices will exert greater pressure on inflation. Credit Suisse has revised its 2008 CPI forecast for Hong Kong to 5.7% from 4.9%. With the lowest unemployment rate in 10 years, soaring nominal wages are also fuelling inflation. However, Credit Suisse has also increased its 2008 GDP growth forecast for Hong Kong to 4.4% from 3.9% because of stronger than expected trade and consumption momentum.
In India, Credit Suisse's economists expect that crude oil prices will drive higher inflation and slow down GDP growth. Oil at current or higher prices will also widen trade deficits and create a heavier fiscal burden for the government, they argue. In the context of current price pressures, Credit Suisse has revised its average FY2008/09 wholesale price index (WPI) inflation forecast to 7.2% from 4.4%. Credit Suisse economists also expect the Reserve Bank of India to continue its monetary tightening, amid rising inflation pressure, creating a negative impact on credit growth and consumption demand.