Frederic Neumann
Co-head of Asian economics research
HSBC
Commodity prices are again on the march. Oil was the first to move, while others, such as soy beans, have now started their trek as well. Despite all the worries about China’s deflating real estate boom, iron ore prices, as well as copper, remain elevated. A pick-up in Chinese demand could quickly push their cost up further. This matters for Asia and for the world more generally.
First, the region continues to grapple with price pressures. Despite the recent slowdown in growth, inflation is remarkably sticky. This reflects structural factors, such as tight labour markets. With demand picking up again, inflation will thus snap back quickly, and faster than in previous cycles. Rising commodity prices only add more fuel to the process.
Second, rising commodities, especially oil, squeeze consumers in the West. In turn, this could slow Asia’s exports. But, more worryingly, it might prompt central banks in the US and Europe to ease monetary policy further, with even more cash ultimately heading East. Asia can no longer absorb the waves of liquidity hitting its shores. They only serve to amplify inflation pressures.
Everyone in Asia faces the same risk of rising prices. But the problem is more acute in some countries than others.
India, China and Korea have arguably faced the strongest price pressures over the last cycle, and could do so again. In Hong Kong and Singapore inflation never really subsided and would jump back as well.
In better shape are the larger [Association of Southeast Asian Nations] economies of Thailand, the Philippines, Indonesia and Malaysia. But, even here, rising commodities will pose headaches for monetary officials.
Erik Lueth
Senior regional economist
RBS
Although Asia, with the help of China, will look comparatively good in terms of economic growth compared to the G7, the region will still slow somewhat, especially as Asia is still quite exposed to the global economic cycle. We expect Asian gross domestic product (GDP) to slow to around 6.6% this year, which compares well to 1.8% and 0% for the US and eurozone, respectively.
Currency markets will not be able to avoid some impact of slowing growth but at the same time we do not expect it to prove disastrous for Asian currencies. The purchasing managers index (PMI) reached a high in January 2011 but has weakened since, reflecting the worsening prospects for the global economy. The good news is that some Asian currencies do not possess a statistically strong relationship with the PMI.
Of those that will react, the most sensitive is the Indonesian rupiah followed by the Korean won. Perhaps surprisingly, given the relatively closed nature of its economy, the Indian rupee registered a statistically strong relationship. This may reflect the fact that it becomes more difficult to fund the country’s current account deficit when growth slows. Unsurprisingly, given the strong trade orientation of Singapore’s economy, the Singapore dollar reacts negatively to a weakening in the global PMI. Against this background we expect Asian currencies, even the ones that are sensitive to the global growth cycle, to appreciate this year.
Dariusz Kowalczyk
Senior economist/strategist for Asia ex-Japan
Crédit Agricole
Commodity prices rose at the start of the year but then corrected in March, except oil, which remained at an elevated level. If the rising trend resumes, Asian economies would, by and large, see higher imports and weaker external positions, stronger inflation, weaker growth and weaker budget positions due to the prevalence of subsidies. Such outlook would reduce the odds of further monetary easing.
However, we believe that the remainder of the year will see a modest correction in commodity prices, in particular in case of oil. This means that price pressures – likely to rebound in the second half – will not intensify excessively. Subsidy-related pressure on budget positions across Asia will also be more manageable. This is particularly important in high-deficit countries, especially India and Vietnam.
Moreover, commodity import bills would decline, supporting external surpluses (and limiting deficits in India and Vietnam). Finally, economic growth would be stronger, attracting more inflows of capital into the region and contributing to further gains in emerging Asian currencies.
The main beneficiaries of weaker commodity prices will be India and Vietnam because the two have the highest macroeconomic imbalances in the region and would find it easier to correct them. Moreover, such a scenario would allow the State Bank of Vietnam and the Reserve Bank of India to have more room to cut rates and stimulate growth, which is particularly important for India.
The predominant market impact would be seen in a stronger Indian rupee, which remains our top pick for the year. The Indian rates and bond yield curves would see bull steepening.
Han Pin Hsi
Global head of commodities research
Standard Chartered
We have a bullish medium-term outlook for commodities. Supply-side risks and the lack of growth in new capacity relative to the healthy expansion in emerging market demand will continue to support prices of many commodities in the medium-term. Monetary conditions are generally the most important medium-term influence on commodity prices, although they can be temporarily overwhelmed by other factors.
Naturally, investor perceptions of monetary policy are extremely important. For instance, if monetary policy reverses from restrictive to accommodative following a stock-market slump, the bullish impact could be explosive. Hence, we expect any further injection of liquidity by the US and Europe to give commodity prices an extra lift. The rise in prices in key industrial commodities – like oil, copper, iron ore, etc – will create headwinds for economic growth, through higher inflation.
A number of Asian central banks have started easing monetary policy since late 2011 in response to slowing cyclical momentum via export channels. Indonesia, the Philippines and Thailand have cut policy rates, while China has reduced its reserve requirement to release more liquidity into the economy. The recent pick-up in oil prices, and the subsequent impact on inflation, may persuade some central banks to postpone further rate cuts or the start of rate-cutting cycles – i.e. delay providing their economies additional boosts.
However we believe that a reversal from rate cuts to rate hikes is unlikely unless oil prices rise more substantially, bringing second-round effects on inflation via other commodity prices and inflation expectations. In the meantime, the impact of high commodity prices on Asian economies has been mitigated somewhat by appreciation in Asian currencies.