Daily Management Review

Morgan Stanley Says Asia's Growth Will Soon Surpass That Of The United States And Europe As Inflation There Has Peaked


Morgan Stanley Says Asia's Growth Will Soon Surpass That Of The United States And Europe As Inflation There Has Peaked
By the end of the year, Morgan Stanley predicted that Asia's growth will surpass that of the United States and Europe since the area had mostly avoided interest rate shocks.
“By the fourth quarter of this year, we think Asia’s growth will be outperforming U.S. and Europe by about 450 basis points,” the investment bank’s Chief Asia Economist Chetan Ahya said in a webinar on Tuesday, hours before the U.S. released its inflation print for May.
He gave grounds for his optimism, saying that while the West lags, Asia is predicted to offer stronger growth rates. In addition, three significant Asian economies—India, Indonesia, and Japan—are all exhibiting strong domestic demand. China's broad recovery may occur in the second half of this year.
“We’re definitely expecting growth in these two economies to be constrained by the fact that they have had this significant inflation problem,” Ahya said in reference to the U.S. and Europe.
In order to control inflation in those markets, he continued, central banks are forced to raise policy rates.
“Asia has not had interest rate shock that U.S. and Europe has had,” he said, adding that Asia’s inflation has been running almost half the run rate compared to the other two regions.
The U.S. inflation rate has been significantly higher than the Fed's yearly target of 2%.
After reaching a peak of 9.1% in June of last year, inflation dropped to 4% in May, the lowest level in two years. As the effort to combat inflation showed some results, the Federal Reserve decided against raising interest rates this week.
The inflation issue in Asia has not been as severe. And we believe the inflation in that area has peaked.
The Fed recently tightened monetary policy at its fastest rate since the 1980s, implementing its tenth successive interest rate increase in more than a year.
Similar to what happened in Europe, the euro zone's inflation rate dropped to 6.1% in May, which is the lowest level since February 2022. The European Central Bank increased its benchmark rates in May from -0.5% to 3.25%, the highest level since November 2008.
“Asia’s inflation problem has not been as intense. And we think that region’s inflation has peaked,” he said. “By the time we are in September [or] October, 80% of [the] region’s countries would have seen inflation going back into central banks’ comfort zone.”
South Korea, Australia, India, Indonesia, and Singapore are among the Asian central banks whose interest rates have been frozen.
The second half of the year's anticipated recovery in China is another factor contributing to Asia's growth.
“We’re expecting China’s recovery to broaden out in second half of this year,” Ahya said. The bank is forecasting the superpower’s growth to be at 5.7% in 2023 compared to 3% last year.
“We think consumption recovery in China is pretty much on track,” he said. That is bound to also bring a positive spillover to other parts of the region as well, he said.
Consumer inflation in China increased 0.2% in May compared to a year ago, but producer inflation dropped 4.6%, marking the country's steepest year-over-year decline in seven years.
According to Ahya, the Chinese markets should experience healthy levels of spending over the course of the next three months.
The bank also anticipates the Chinese government to announce other stimulus measures, such as a loosening of restrictions on home purchases and the delivery of an infrastructure funding programme worth approximately $1 trillion.
On Thursday, China lowered the one-year medium-term lending facility's (MLF) benchmark lending rate by 10 basis points.
The seven-day reverse repurchase rate, a kind of short-term borrowing rate, was decreased by the People's Bank of China on Tuesday from 2% to 1.9%.
Additionally, the domestic demand recovery cycles in India, Indonesia, and Japan contribute to the region's overall growth rate.
“India has been also implementing structural reforms over the last five years ... that’s driving private investments higher,” Ahya said.
He anticipated that India's growth would exceed the 5.9% forecast by the International Monetary Fund in 2023, coming in at 6.5%.
The economist said that Indonesia's adoption of conventional macro policies has also structurally decreased the country's inflation, which he attributed to the government's resolve to maintain a fiscal deficit below 3%. Because of this, he noted, Indonesia has one of the lowest public debt to GDP ratios among developing market countries, at under 40%.
According to Morgan Stanley, Japan is in a "sweet spot" where deflation is ending but inflation problems are not as severe as they are in the United States and Europe.
“That’s creating an environment where the economic machine works.”