Economic growth in Asia, which has been slowing in recent months, is set to recover in the second-half of the year, on the back of a rebound in China, say economists at HSBC.
The region’s growth drivers, China and India will hit a bottom over April-June, with economic expansion slowing to 7.8 and 5.3 percent, respectively, before bouncing back to 8.5 percent and 6 percent, in the third quarter, says the bank.
“In China, a generous policy refill should spur local demand, even if exports to the West begin to falter amid Europe’s travails,” Frederic Neumann, Co-Head of Asian Economics Research at HSBC said in a quarterly report published Tuesday.
Over the rest of the year, HSBC forecasts the central bank will lower the reserve requirement ratio for banks by 200 basis points, and cut the benchmark interest rate by a further 25 basis points.
Neumann expects policymakers will also support the economy through fiscal measures including tax cuts and direct spending on public housing and infrastructure projects.
“A combination of fiscal and monetary easing should generate demand, lift business confidence, digest finished goods inventories and promote another cycle of inventory accumulation in the second half,” Neumann said, adding that since China has become the biggest trading partner for many regional economies, “Asia will avoid another collapse in growth.”
South Korea, for example, now exports more to the mainland than to the U.S. and the euro zone combined.
Imports into China are also now being consumed locally instead of being re-exported, says Neumann, highlighting growing domestic demand in the country.
Falling Oil Prices Another Boost
Besides Chinese demand, another positive for Asian economies is falling oil prices, which will increase purchasing power and lead to an increase in consumer spending across the region, says Neumann.
“The drop-off in oil will largely benefit the Southeast Asian economies, like the Philippines and Indonesia, which are domestically driven,” he said.
Lower oil prices also give governments in India and Indonesia more room to cut subsidies and support growth via fiscal stimulus, Neumann said.