Could Asia Come to the Rescue in a Global Double Dip?
Expansionary policy in Asia helped lead the world out of its slump after the 2008 financial crisis. While the region doesn’t have as much room for manoeuvre as it did then, we think it has ample firepower to deploy if the global economy slides into recession again.
On the monetary policy front, we think central banks in the region have room to cut interest rates and stimulate their economies, since real interest rates are high, as shown in the display below. In fact, real interest rates—nominal interest rates minus the rate of inflation—have been rising across the Asian region, thanks to declining inflation. Currently, real rates outside of China stand at around 0.50% to 1.20%, but we expect disinflationary pressures to continue, which would further increase the policy flexibility of countries across the region. Meanwhile in China, the authorities are targeting the one-year benchmark lending rate, which currently stands at a two-year high of 3.3% in real terms. As disinflation persists, it will only make a rate cut more palatable for the central bank.
One caveat is that most Asian economies are more highly leveraged than they were in 2008, with a significant rise in loan-to-GDP ratios in recent years. In theory, this could mean that higher rates are necessary to encourage deleveraging. In Thailand, for example, overseas borrowing and short-term debt have been on the rise, leading to a hawkish policy stance from the Bank of Thailand. But we see less cause for concern elsewhere in the region. Overall, loan-to-deposit ratios still appear relatively healthy, suggesting that banking systems are not that stretched. In short, we think that most central banks in the region will act quickly to cushion any economic slowdown.
Room for Fiscal Stimulus
The fiscal positions of most countries in Asia are much worse than they were just before the collapse of Lehman Brothers in 2008. Hong Kong and Singapore are the only countries in the region expected to enjoy budget surpluses in 2012. Nevertheless, we think there is still room for fiscal expansion, notably in China, Korea and Singapore.
China’s budget deficit was only a modest 1% of GDP in 2011, which leaves plenty of room to pursue the “proactive fiscal policy” referred to in recent policy statements. China’s fiscal policy is focused on supply-side measures in the form of tax cuts and incentives for households and the corporate sector. Furthermore, given that China still has a long way to go before reaching a mature stage of economic development, we think there is plenty of room for the government to rev up demand by “fast tracking” new major investment projects if necessary.
In short, Asian economies have less monetary and fiscal firepower to fight a global recession than they did in 2008. But policymakers—particularly in China—have the tools to stimulate economic growth again. And we think they will, in all likelihood, use them to prevent the economic slowdown from getting out of hand.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Anthony Chan is Asian Sovereign Strategist—Global Economic Research at AllianceBernstein.