Asian policy makers eager to sustain growth in 2012 may put their economies at risk with interest-rate cuts or fiscal stimulus that some can ill-afford.
The likelihood of “policy mistakes” in 2012 may increase as a slowing global expansion puts pressure on officials to lower borrowing costs even as inflation remains elevated in some economies, said Lim Su Sian, a Singapore-based strategist at Royal Bank of Scotland Group Plc. In India, where the central bank has paused raising rates, monthly inflation has held above 9 percent; prices in China exceeded the government’s full-year target of 4 percent every month this year.
Asian nations from Thailand to Indonesia and Malaysia have reduced interest rates or left them unchanged in recent meetings to shield their economies from the protracted European debt crisis. Fitch Ratings raised its forecasts for price gains for the region for this year and next even as it lowered growth estimates, and said while many Asian economies have scope for policy responses, China and India are “exceptions.”
“There will be central banks that feel they have to cut but whether or not they can is an entirely different issue,” said Lim. “For some of these countries, they are going to feel a little challenged because on the one hand, growth is clearly slowing but on the other hand, inflation is still not yet coming off. That creates the potential for policy mistakes.”
Highlighting the risks from Europe’s debt crisis, South Korea’s industrial production unexpectedly fell in November for a second straight month. Output dropped 0.4 percent compared with October when it declined a revised 0.6 percent, Statistics Korea said today. The Bank of Korea refrained from raising interest rates for a sixth month in December to support growth.
Inflation risks eroding the purchasing power of consumers when Asian economies are depending on domestic demand to boost growth as exports weaken. The volume of global trade will increase 5.8 percent in 2012 compared with 7.5 percent this year, the International Monetary Fund said in September, damping the outlook for a region estimated by the World Trade Organization to have exported $4.69 trillion of goods in 2010.
Asian stocks dropped for a third day after a surge in the European Central Bank’s balance sheet underscored financial stresses in the euro zone.
The MSCI Asia Pacific Index fell 0.7 percent to 111.96 as of 10:28 a.m. in Tokyo with all but one of the gauge’s 10 industry groups falling. For the month, the index is heading for a 1.2 percent decline. The measure has dropped 19 percent this year, the most since 2008.
In Europe today, reports may show retail sales in Spain fell last month, Sweden’s trade surplus narrowed in November from a month ago and Italian business confidence weakened this month, according to Bloomberg surveys of economists. Germany’s consumer price index may have gained 0.8 percent in December from a month earlier, according to the median forecast of 26 economists surveyed.
In the U.S., first-time claims for unemployment benefits may have totaled 375,000 in the week ended Dec. 24, compared with an initially reported gain of 364,000 a week earlier, a survey of economists showed ahead of a Labor Department data on recipients of government jobless benefits.
Business activity in the U.S. may have expanded at a slower pace, according to figures to be released today by the Institute for Supply Management-Chicago Inc. For a view of the housing industry, a National Association of Realtors report may show pending home sales rose 1.5 percent in November from a month earlier, a slowdown from a 10.4 percent rise a month earlier.
Emerging East Asian economies may grow 7.2 percent next year after expanding 7.5 percent in 2011, the Asian Development Bank says. Fitch raised its 2011 inflation estimate for Emerging Asia by 0.3 percentage points to 5.9 percent and its 2012 price forecast to 4.9 percent from 4.7 percent.
Indonesia cut borrowing costs by 0.75 of a percentage point in October and November to a record low even as its economy grew more than 6 percent for a fourth straight quarter. India held off tightening in December after raising interest rates by a record pace.
China’s central bank cut the amount of cash that lenders must set aside as reserves for the first time since 2008 this month after inflation eased to the slowest in 14 months in November. China should be prepared for a possible inflation rebound next year, Xinhua News Agency said this month, citing Yang Weimin, vice chairman of the Office of the Central Leading Group on Financial and Economic Affairs.
Most Asian policy makers have allowed their currencies to depreciate this year to defend exports. The Indian rupee has lost about 16 percent, followed by the Thai baht and the Taiwanese dollar. Sri Lanka devalued its currency in November.
With the Indonesian central bank’s defense of its currency unsustainable, the country’s assets will be “vulnerable,” RBS says, recommending investors buy five-year credit default swaps at 225 basis points. Bank Indonesia plans to boost “intervention” to support the rupiah, Governor Darmin Nasution said on Nov. 30 after the currency touched a 17-month low of 9,240 a day earlier.
“Currencies have weakened so imported price pressures are still building,” said Rahul Bajoria, a regional economist at Barclays Plc in Singapore. “Officials will remain a bit more vigilant on inflation because inflation expectations are still elevated” especially Singapore, Malaysia and South Korea, where labor markets are tight.
Asian policy makers spent about $1 trillion in stimulus measures during the global financial crisis of 2008 and 2009 to stave off deep recessions or sharp slowdowns in their economies. Malaysia and the Philippines have unveiled stimulus measures for their economies, and others may follow in an attempt to spur consumption as overseas demand slows.
“The growth bias is starting to creep in and there will probably be a more proactive use of fiscal policy in 2012 than monetary policy because the pass-through is faster,” Bajoria said.
Still, India may have less room to deploy fiscal stimulus, while any such steps in China won’t be as large as the 4 trillion-yuan package introduced in 2008, Bajoria said. India’s “fiscal stress” may deteriorate on widening subsidies and slowing taxes, the central bank said Dec. 22.
China’s banking system is still working through the consequences of the credit-led stimulus of 2009 and 2010 and “may struggle to repeat the effort,” according to Fitch.