Non-Japan Asia is leading the global economic recovery, but the growth trend is flattening out as the stimulus effect begins to taper, according to Credit Suisse's vice-chariman of fixed income.
At the same time, recovery in the G8 countries has been slow due to grave corporate debt problems, Bunt Ghosh said as he shared his firm's outlook for the region at the Credit Suisse Asian Investment Conference in Hong Kong yesterday.
The real story behind the growth slowdown, he argued, is that the corporate sector has been cutting back on inventory. "In terms of industrial production, the corporate sector has not expanded inventory," said Ghosh. "Until the corporate sector starts rebuilding inventory, the risk is that Asia's growth will plateau."
Credit Suisse has run an assessment of industrial output for key countries in the region (China, India, Indonesia, Korea, Malaysia, Taiwan, Thailand and Singapore), which shows that all of them are performing below the expected GDP growth rates.
This trend can be attributed to what is happening in exports across Asia. If the forecast for inventory proves to be right, then export growth could be pegged as the next leg of the recovery, which will put an end to the plateau in industrial production levels.
"If you hold sales growth (consumer demand) flat, the inventory recovery will start to kick in," commented Ghosh. If this happens, it is expected that it will occur in the third and fourth quarter of this year. And that could give non-Japan Asia a decent amount of leverage.
Inventory is a crucial element to the global recovery because of the need for the corporate sector to spend in order to alleviate the government sector from the existing debt bubble.
"If you look at the last decade, the bubble of debt blew up in the corporate sector (the tech industry), then moved to the household sector and is now sitting in the government sector," said Ghosh. "A successful exit strategy requires this bubble to be more evenly spread across all three sectors."
Currently, households do not have the capacity to take on any more debt as they remain over-leveraged. However, the private sector is filled with corporations that have started the year with cashed-up balance sheets and therefore are in a strong position to be able to pick up this debt and relieve the public sector from its burden.
"One way or another we are going to have to get the corporate sector to start investing," said Ghosh. "If you don't get that happening, exit strategies become quite difficult to execute."
Another aspect of Credit Suisse's market outlook is inflation. When looking through the short- to medium-term window, inflation is not a major issue either in Europe or the US as core inflation and headline inflation are currently both down.
In Asia too, core inflation is proving not to be an issue. The bulk of inflationary change that is being experienced in the east comes from headline inflation plus food and energy prices. Given this, Ghosh says policymakers in the region may wish to appreciate their currencies in order to try and tackle the energy and food crises in Asia, as a method of bringing down inflation.
