Asian economies have stumbled in recent months. High inventories, the
lagged effects of tightening in China, and lackluster growth in the
West have all taken their toll. Inflation, as a result, has slowed.
But
this is a mere cyclical dip in the structural ascent of price pressures
across the region. Investors and policymakers alike shouldn't rest too
easy. With another stimulus being applied by the world's major central
banks, and Asia's return to more vigorous growth in the coming quarters,
inflation will again become a cause for worry.
It is easy to lose
sight of the bigger picture. The world economy is stuck in a rut. China
no longer has its usual swagger, the U.S. dangles over the fiscal cliff,
and Europe is lost in contemplation of its enduring problems. Japan,
meanwhile, is greying fast, with the occasional stimulus merely painting
over its structural cracks. Why, then, should anyone worry about
inflation?
First, the cycle masks broader structural trends.
Emerging markets, led by Asia, are on the rise. According to the
International Monetary Fund (IMF), they will account for more than 50
percent of world gross domestic product (GDP) for the first time this
year. Only 12 short years ago, their share was only 37 percent. Granted,
this is measured on a purchasing power basis, but this is ultimately
what matters for global inflation. The stagnation in the West is thus no
longer enough to hold world prices at bay.
Consider a simple
example. In 2000, a percentage point increase in U.S. growth added 0.23
percent to world demand, while a percentage point increase in China's economy
contributed a mere 0.07 percent. Today, the numbers are converging
rapidly. A one percentage point rise in U.S. GDP now contributes about
0.19 percent to world GDP, while China adds 0.15 percent.
Assuming
that the U.S. economy will grow by 2 percent this year, and China, say,
by 7.5 percent (Beijing's official target), the contribution of the
latter, despite being deemed a disappointment by financial markets, will
eclipse that by the U.S. by a factor of at least 3. Even in U.S. dollar
terms, the incremental increase in world demand accounted for by China
is almost double that by the U.S.
Second, the composition
of growth in emerging markets has shifted. Exports are less important
today than domestic demand. Asia, for instance, has seen a rapid decline
in its once sturdy current surpluses. Local demand, led by services and
construction, is much more inflationary than growth that is driven by
manufacturing exports.
Third, and unsurprisingly, emerging
economies are bumping against growth constraints. Labor markets are much
tighter across emerging markets today than only a few years ago. In
China, despite the recent deceleration, employment is holding up
remarkably well, in contrast to the Global Financial Crisis, when job
shedding by exporters led to wide-spread layoffs. And this is not just
the case on the mainland, across Asia labor markets have remained highly
resilient in the face of faltering growth.
Fourth, global central
banks have once more turned on the spigot. The Federal Reserve, the
European Central Bank, the Bank of England and the Bank of Japan just
announced further easing. All that extra cash will ultimately flow to
where returns are the most promising. We have seen it before, and it's
happening again: emerging markets will see their demand pumped up once
more as a result. Inflation will be the thing to worry about.
Frederic
Neumann is co-head of Asian Economics at HSBC's Global Research and has
been covering regional economies for the past 7 years. He is a regular
guest on CNBC TV.
http://sg.finance.yahoo.com/news/why-asia-start-worrying-inflation-060725568.html
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