Monday, June 7, 2010

Overheating is the main concern

Growth in Asia accelerated significantly in early-2010 and we have adjusted our GDP forecast up for all major Asian economies, including China and Japan. Our upward revision mainly reflects a very strong H1 10.  We still expect GDP growth in Asia to peak in Q1 as the positive impact from inventory adjustments and policy stimulus gradually wanes and the impact from tightening kicks in, not least in China. So far we see a modest impact from the European debt crisis. With fiscal policy flexibility intact, Asia should continue to perform well even in a more negative scenario for Europe. Despite stronger than expected growth inflation has, with the exception of India, increased less than expected, mainly because commodity prices have stabilised globally. However, inflation is still expected to increase and reach close to 4% in China by the end of the year. In Japan, deflation is the main concern and consumer prices are not expected to start increasing until Q3 11. Muted inflation and increasing concern about the impact from European monetary tightening has postponed monetary tightening in most Asian countries. China's revaluation has probably been postponed until Q3, but is not off the table. In Japan monetary tightening will lag the rest of Asia and the US but we can no longer rule out that Bank of Japan will tighten before the ECB.

Research Asia

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