Emerging markets: Asia to slow with no hard landing

Last year was punctuated by a number of events that investors did not expect.

At the beginning of 2011 no-one or almost no-one was forecasting wholesale political change in the Middle East, the downgrade of the long-term US sovereign debt rating by rating agency Standard & Poor’s or the tragic Japanese earthquake and its debilitating after-effects. Yet they all had a material negative impact on financial asset prices.

More predictably, Europe’s debt crisis escalated while US politicians argued over deficit proposals, and it appears a number of the concerns which dogged markets in 2011 have spilled over into 2012. It seems there will be no ‘quick-fix’ solution to the eurozone’s problems, particularly if Italy and Spain fail to re-establish the confidence of the markets. But even if they do there will remain an overhang of risks in the implementation of economic austerity programmes.

For its part the US is looking in slightly better shape but tensions are expected to remain high in the run-up to the presidential and congressional elections. In addition, further focus on the US sovereign debt rating and the need to curb the growth in indebtedness seems likely to have an impact on progress in the second half of the year.

No doubt as we move into 2012, there will be additional shocks along the way. However, the consensus view of the emerging economies remains more optimistic than that for the developed world.

Growth in Asia is likely to slow too, primarily because this region cannot entirely decouple itself from the rest of the world. However, slower growth does not equal zero growth. While Chinese economic growth is expected to slow, a so-called hard landing is not anticipated. The consensus forecast is for 8.3 per cent economic growth in China in 2012. In addition the consensus expectation is that India will achieve 7.5 per cent GDP expansion, a level broadly in line with 2011, while the Brazilian economy, the largest in Latin America, is expected to grow by 3.2 per cent, again largely in line with the expected figure for 2011. These are figures most western economies would be delighted to come close to achieving.

The consensus view for inflation is that it is unlikely to be a problem in the developed world, with inflation forecast to be lower virtually across the board. Inflation is also expected to fall in many emerging economies in 2012, including China, where it has already turned lower. Forecasts suggest that Japan will continue to struggle with mild deflationary pressure.

A number of emerging market central banks, in countries including China, Brazil, Indonesia and Thailand, have also cut interest rates (or bank reserve ratios) to stimulate growth as concern about inflation recedes. Many such countries still have scope to ease further and to fund development projects with bond sales, while in many western countries policy rates are already near zero and public debt is significant.