News Analysis: Asian Economies Encounter Stiff Winds

For the last few years, Asia’s developing economies — like China, Indonesia, the Philippines and Thailand — have been powering ahead of much of the rest of the world, buoyed by a heady cocktail of stimulus from policy makers at home and investment flows from abroad. In 2011, the region grew more than four times as fast as the American economy, and last year’s 6.5 percent growth was nearly three times that of the United States. Stock markets in the Philippines and Thailand were among the world’s best performers in 2012.

Over the past couple of months, however, some of the shine has come off the Asia story.

“The music has stopped playing,” said Frederic Neumann, a co-head of Asian economics at HSBC, which on July 9 slashed its growth forecasts for Asia, outside of Japan, to 6.1 percent for this year and 6.5 percent next year. The bank had projected 7.2 percent growth for both years.

One week later, the Asian Development Bank followed suit, trimming 0.3 percentage point off its projections for developing Asia. (The bank’s definition includes more countries than HSBC’s.) That leaves it with forecasts of 6.3 percent expansion this year and 6.4 percent in 2014.

The region was expected to bounce back from its “relatively sluggish” growth pace in 2012 but is now expected to pick up “only slightly,” the bank said in its regular review of the region’s economic outlook.

And Wednesday, the latest evidence of weakness in the Chinese economy emerged in the form of a survey that showed manufacturing activity in July contracting at its quickest pace since last summer. The survey, compiled by the research firm Markit and released by HSBC, produced a reading of 47.7 points for this month, down from 48.2 in June. A figure below 50 signals contraction.

As Mr. Neumann put it: “The air is getting thinner.”

This is also bad news for the rest of the world, which had been hoping that booming expansion in Asia could inject some much-needed oxygen into a global economy that is weighed down by anemic growth in the West.

The problem for developing Asia is that two of its main drivers of growth — China’s once red-hot economy and an inflow of money prompted largely by the Federal Reserve’s efforts to revive American growth — have fizzled.

Since May, when the Federal Reserve chairman, Ben S. Bernanke, signaled that the United States economy might soon be ready to be weaned off the huge purchases of Treasury securities it has been enjoying since the global financial crisis, emerging markets around the world have watched investors pull their money out of assets they deemed more risky.

While the Dow Jones industrial average and the Standard Poor’s 500-stock index in the United States have soared to record highs, stocks in most Asian markets have sagged, with key market indexes in Indonesia, the Philippines and Thailand down about 9 percent since mid-May.

Currencies like the Malaysian ringgit, the Philippine peso and the Thai baht have all dropped about 5 percent against the dollar. In Indonesia, the rupiah fell earlier this month to 10,000 per dollar for the first time since September 2009.

In India, the rupee is hovering near its weakest-ever level against the dollar, prompting the central bank to announce a number of steps this month aimed at arresting the currency’s slide. And Indonesia and Thailand recently lowered their growth forecasts for 2013.

To a large extent, the declines are not unexpected after a period of strong gains, as investors in search of high returns poured into Asian markets over the past few years. Analysts had long warned that the inflows could reverse if conditions changed.

Now that that has happened, economists at Australia New Zealand Banking Group wrote in a recent report, the region is “facing the consequences of having drunk too readily from an abundance of virtually free credit.”

For the most part, companies are well financed, analysts say, and the recent turmoil does not herald imminent collapses or a flood of defaults. But it has, at least for now, turned off the faucet on the cash that had helped fuel Asia’s recent growth spurt.

“The region’s leverage-driven growth model has come to an end,” said Mr. Neumann of HSBC.

What is more, the jitters about the Federal Reserve’s bond-purchase plans have coincided with rising nervousness about China’s cooling economy.

After years of powering ahead at growth rates of more than 10 percent a year, China is now in the throes of a major economic overhaul aimed at raising productivity and domestic demand.

But that revamp comes with slower growth. The economy — the second-largest in the world after that of the United States — could struggle to grow at a rate of 7.5 percent this year.

Article source: http://www.nytimes.com/2013/07/25/business/global/asian-economies-encounter-stiff-winds.html?partner=rss&emc=rss