Asia could face the threat of inflation in the second half of the year as economies begin to expand again, according to Frederic Neumann, Co-head of Asian Economic Research at HSBC Bank.
Better-than-expected industrial numbers from South Korea Friday suggest that economies in Asia are at a beginning of an upturn and growth should return to the region soon, Neumann told CNBC.
“These are the very early signals that things are coming back,” Neumann said. “Trade is always a leading indicator. Once the domestic Chinese economy fires up as well, this would lead to strong growth numbers.”
Production in the mining and manufacturing industries in South Korea jumped 14.4 percent in February from a year earlier after contracting 2.1 percent in January, according to a government report Friday. The manufacturing sector, which makes up 94 percent of all the industrial output in the country, gained 14.8 percent from the previous year and rose 0.8 percent on-month in February after shrinking 1.9 percent in January.
“Critically we think that inflationwill come back as a risk for the second half of the year,” he added. “Economies like Korea for example could see rate hikes in the fourth quarter. We believe that Thailand could be hiking rates at some point so we would be shifting towards tightening expectations over the summer months.”
In a separate report last week, Neumann said output gaps – the difference between the actual level of output and what the economy would produce if it ran at normal speed – are narrowing. If output exceeds an economy’s long-term potential, inflation will rise. This scenario will happen across Asian economies by the middle of the year, HSBC said.
“The rebound in inflation may actually be sharper in this cycle than output gap estimates suggest due to structural factors that are fanning price pressures in Asia,” the report said. “Oil, food, tight labor markets and liquidity galore…hard to see what other conclusion to draw.”
To deal with these inflationary pressures, central banks across Asia will have to increase interest rates, HSBC said. Korea and Taiwan will have to tighten monetary policy before the end of the year and Singapore will have to adjust its exchange rate.
Malaysia, Hong Kong, India, China, Sri Lanka and Thailand will face the greatest inflation pressures, the bank added.