Asia-10's growth predicted to hit 6.3% again in 2015, 2016

Will fluctuation in inflation change this big time?

It has been noted that Asia’s industrial production and exports have run rock-steady growth paths for the past four years.

According to a research note from DBS, Asia-10 growth has averaged 6.3% for the past three years and we expect it will do so again in 2015 and 2016.

DBS noted that the major change in Asia of late has been inflation. After running at a steady pace for four odd years, it has fallen sharply since mid-2014.

India’s inflation has fallen to 5.4% YoY; a year ago it stood at 7.9%. Indonesia’s inflation has fallen to 6.3% from 7.7% a year ago. China’s has dropped to 1.4% from 2%. Malaysia’s to zero from 3.5%. In Taiwan, Singapore and Thailand, inflation is now negative.

It’s easy to say that falling inflation owes to the 50 percent drop in oil prices since July 2014. But it’s not all, or even mainly, about oil, said DBS. Core inflation, which excludes food and energy, has been falling for 3.5 years. It’s now down to 2.2%-2.5% YoY, half what it was in mid-2011.

In all Asia-10 countries, save for Hong Kong, Taiwan and China, core inflation is running 30%-40% below long-run average. So the fall in Asia’s inflation isn’t just about oil.

Here's more from DBS:

As argued previously Asia’s strong currencies have much to do with today’s low inflation, especially recently. Although currencies are down against the dollar, they are up against the euro and yen.

Against this tri-currency basket, most Asian currencies have strengthened by 5%-12% since mid-2014. This appreciation is putting as much downward pressure on inflation as low oil prices are.

How so? Imports account for 20%-35% of GDP in Asia, much more in Singapore and Hong Kong. Oil imports account for 1%-6% of GDP.

An 8% currency appreciation on imports worth 25% of GDP puts the equivalent of 2 percentage points of GDP of downward pressure on prices. A 50% drop in oil prices on imports worth 3% of GDP brings only 1.5 percentage points of downward price pressure. Currencies matter – as much or more than oil prices.

For whatever reason, inflation is falling in headline and core terms and central banks are taking advantage of the situation to ease monetary policy. China has cut the base lending rate by 65 basis points since November. India has cut policy rates by 50 basis points since January.

Singapore eased its currency bands in late-January and Indonesia cut policy rates by 25 bps in February. Korea has cut twice by a total of 50bps since November. This is curious, to say the least. Back in 2H13, emerging markets were hit pretty hard by the ‘taper tantrum’ that erupted when Bernanke suggested that QE might – might – start to get phased out later that year if recovery continued to proceed apace.

Today, the world isn’t talking about maybe easing back on the accelerator, to use Bernanke’s phrase, it’s talking about the Fed hitting the brakes. Rate liftoff is imminent, most believe.

Are Asia’s central banks building fortress walls to guard against another taper tantrum? No, they’re lowering rates, showing their slips. Pretty racy stuff. Growth is steady. Inflation is falling. The US prepares to hike and Asia’s central banks are lifting their hemlines. We’re not in Kansas anymore. A eerie calm prevails.