world comment
Emily Kaiser
A Reserve-rich Asia can afford to turn on the government spending taps should a recent bout of sluggish economic growth deteriorate into a deeper downturn.
For countries counting on exports for growth - in other words, most of Asia - overseas demand during the next couple of months may look as shaky as it did in May and during last month.
A series of manufacturing surveys released last week showed export orders weakened, particularly from Europe and the US. As long as those regions struggle with slack consumption, Asia's trade powerhouses will suffer.
"Clearly, we are in for a rough summer," said Frederic Neumann, the co-head of Asian economics for HSBC in Hong Kong, which compiles the monthly manufacturing surveys in Asia.
But Mr Neumann saw some promising signs amid the gloom: inflation pressures are ebbing.
That means if growth does not pick up soon, governments will have more leeway to ramp up spending without worrying so much about prices overheating. That takes some pressure off central bankers, who are struggling to cool inflation without snuffing out growth.
"As inflation fades, Asian officials - and above all Chinese - will be able to crank the stimulus dial one more time, and lift growth into year-end," Mr Neumann said.
To be sure, Asia's inflation battle is not yet won. Inflation is still running well ahead of government targets in China, India, South Korea and elsewhere, even after a drop of almost 20 per cent in oil prices since early May.
"Core" inflation, which strips out volatile prices such as those for food and energy, has been creeping higher. Low unemployment in the region gives workers more clout when it comes to negotiating wage increases to keep up with rising inflation.
But that poses the risk that companies will increase prices to offset higher labour costs, touching off a wage price spiral that drives inflation even higher.
That is one reason economists widely expect further interest rate increases across the region, with India, Malaysia and Thailand among the central banks tipped to increase rates this month. Last week, Taiwan's central bank raised rates.
Jan Loeys, the head of asset allocation for JPMorgan in New York, said even if overall inflation was peaking, as many economists believed, "at best it implies a temporary pause, and more likely just a slowing in the tightening process".
Why? Emerging market interest rates are not even halfway back up to the levels seen before the 2008 financial crisis.
On Tuesday, Australia kept its interest rates on hold after retail sales dropped unexpectedly in May.
Malaysia's rate decision is due today, and it is also expected to remain on hold after rates were raised in May. Zeti Akhtar Aziz, the central bank governor, said last week economic growth was still key to monetary policy.
"We don't run the economy to the ground just to have price stability," she said.
With an assist from the government's coffers, central bankers would have a better shot at targeting inflation without causing too much collateral damage to growth.
Compared with most advanced economies, Asia is in an enviable position. Unlike the US, Britain and other "rich" countries saddled with trillions of dollars in government debt, Asia's big economies boast large reserves and small debt burdens.
In China, for example, the government could compensate for tighter credit conditions by boosting investment in housing. With more than US$3 trillion (Dh11.01tn) in reserves, funding is not an obstacle.
"China's pursuit of loose fiscal policy should outweigh its tight monetary stance," Bank of America-Merrill Lynch economists wrote in a recent note to clients.
* Reuters