“The debate over Asia 'decoupling’ is too black and white for our liking,” said Robert Subbaraman, Nomura’s chief economist for Asia ex-Japan.
Global financial markets are too integrated for Asia to fully decouple from the major industrialised countries. But, on the other hand, Nomura believes that Asia’s economies are in the process of rebalancing towards domestic demand, China, and emerging markets in general.
“This process is happening faster than most people realise,” said Subbaraman during a media call on December 15. He added that Asia is becoming less reliant on the G3 economies of the US, Europe and Japan, and “is well on the way to being able to achieve its full growth potential, even with only 1%-2% growth in the G3”.
Nomura expects the economies of Asia ex-Japan to collectively grow by over 8% in 2011-12, led by 9% to 10% growth in China.
In contrast, economic growth in the G3 regions will be sluggish. Nomura forecasts GDP growth of 1.9% in the euro-area, 1.1% in Japan and 3% in the US. In all, the world’s GDP is likely to grow by 4.3%, according to Nomura’s calculations, with China and India contributing 50% of that figure, and emerging markets in general making up 75% of global growth.
However, if there is another G3 recession – which is not Nomura’s base case – “Asia would be hit hard again”. On the positive side, Asia's fiscal strength and “sound fundamentals” would help the region recover faster than anywhere else.
Even though Asia has been losing some growth momentum recently, Subbaraman thinks this is temporary.
“The bigger macro picture is Asia rebalancing,” he said.
Consumption should soon be a bigger component of China’s GDP, and Subbaraman highlighted the solidity of Indonesia’s domestic demand-based economy.
But, the region as a whole face problems, not least those caused by surging capital inflows, rising commodity prices and a vast pool of foreign exchange reserves, which are increasingly creating more problems than solutions due to the need for central banks to sterilise them.
Subbaraman also warned against Asian policymakers “micro-managing” their economies, for instance through the use of capital controls and taxes on financial instruments. The danger is that these types of measures might be implemented in lieu of long-term, market measures required to address imbalances and deal with economic cycles.
He and his team have identified at least 25 instances of such tinkering in 2010. These are unlikely to have sustainable benefits and will lose effectiveness over time. They also distract from important interest rate hikes to pre-empt inflation – which could surprise on the upside in 2011-- or decisions to allow domestic currencies to appreciate.
India, in particular, is vulnerable, due to its fiscal and current account deficits. Hong Kong, too, has to battle with the dichotomy of importing the US Federal Reserve’s quantitative easing while having an economy closely tied to China. In fact, Subbaraman doesn’t rule out Hong Kong abandoning its peg to the US dollar and instead linking it to the renminbi sooner rather than later.
Another outlying risk is for a major setback in China; at present, the economy is unbalanced, with investment making up more than 50% of GDP. But, productivity is increasing, and the whole region should benefit from an infrastructure boom.
Asia’s economies are rebalancing, but Subbaraman warns that, “unless macro policies also rebalance, setbacks are likely”.