Asia’s GDP growth to slow down to 6.9%

We’ve lowered our numbers for Asia. The reasons are straightforward. First, our US economist downgraded his growth numbers modestly last month, but overnight UBS cut the European growth outlook in half for 2012 (old 2.0%; new 1.0%). Taken together the two downgrades argue for a rethink. Second, incoming macro data on its own warrants a downgrade, along with increased downside risk due to ongoing financial turmoil in global markets. We are less optimistic about economic growth, but more confident that inflation will come down and that policy tightening will end soon, in line with our previous thinking.

Historically, of course, one should expect more beta for growth and inflation in the small open economies and that is reflected in our latest numbers. China, India, and Indonesian growth should be less affected by a global slowdown, but weaker global growth should help bring inflation down as economic growth and commodity prices soften.

We now expect Asia ex Japan to slow to 6.9% (old 7.2%) this year and 6.4% next year (old 7.3%). We forecast China to slow to 8.3% (old 9.0%) in 2012. Small Asian economies are likely to slow toward 3% next year, with growth expected to bottom in 1Q12 and gradually improve in 2H12.

Inflation should ease because of weaker economic growth and moderating food and oil prices. This logic is strongest for the smaller economies, but importantly we’ve lowered the inflation forecast for both China (old 4.0%; new 3.5%) and India (old 7.5%; new 6.8%) as well for 2012.

The biggest change to our rate forecasts is India. We now believe that India will cut rates 50bps next year as inflation recedes. For the rest of Asia we generally believe that central banks will be on hold until 2H12, when they may resume the process of normalizing rates assuming economies are improving again by then.

Trend appreciation remains our medium-term view. We have not changed our RMB forecast, where the currency shows no signs of weakening. For Japan it’s a case of can the BoJ stop the JPY from appreciating? We’ve priced in some near-term weakness for smaller economies, but believe that will not last more than a few months.