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Brace for Worsening Slowdown Across Asia: Nomura

Most Asian economies from Indonesia to India will deteriorate in the second half of the year because demand from both domestic and foreign buyers will weaken, according to Nomura. The exception is China, where monetary easing and fiscal policies are already starting to take effect and will help its economy rebound in the third quarter.

Brigade Road in Bangalore, Karnataka.
Peter Adams | The Image Bank | Getty Images
Brigade Road in Bangalore, Karnataka.

Exports, especially to the European Union are continuing to weaken, with no signs of improvement, Nomura’s economics team led by Robert Subbaraman wrote in a report published Thursday.

According to the bank, firms are already delaying capital investments, especially in South Korea and Taiwan. Any hope that China could lift regional economies is also ill-founded, Nomura said, because China’s resilience will largely be based on domestic demand.

“If the U.S. and European economies continue to weaken, we are cognizant that Asia's very open economies, many have exports comprising over half of GDP, could be nearing a tipping point where non-linear economic effects kick in, accelerating the downturn,” Nomura said. “In particular, there could be large capital flight, given that, on our estimates, the region has attracted over $750 billion worth of net capital inflows since the global financial crisis.”

China’s support to the rest of Asia will only be a quarter of what it was in the aftermath of the global financial crisis in 2008, Nomura said. India, which is already seeingits worst quarterly growth in 3 years, is also particularly vulnerable to a global slowdown because the government will have difficulty implementing pro-growth policies.

Nomura is slashing its growth estimate for India for the current financial year ending March 2013 from 6.7 percent to 5.8 percent, and said there will be “downside risks” to its forecasts for Singapore and South Korea, both of which it said may grow 2.7 percent in 2012.

Separately, HSBC is also worried about the prospects for Asian economic growth in the coming months as exports are already declining, the British bank said in a report published on Monday. It is however more bullish about domestic demand than Nomura and expects local buying to “hold up much better than expected.”

“Exports, Asia's traditional economic fuel, will likely stumble,” Frederic Neumann, HSBC’s Co-Head of Asian Economics Research wrote in the report, adding that the bank’s own leading indicator for electronics is pointing to a slump in output and shipments in the third quarter.

“This matters: some 40 percent of manufacturing output in Asia is tied in one way or another to the (electronics) sector,” Neumann said. “In China and India, consumption and investment cooled over the first half of the year. In Hong Kong, Singapore, Korea, and Taiwan, local demand has also weakened, even if, all considered, it remains surprisingly robust.”

The larger Southeast Asian economies still enjoy healthy growth in household and investment spending, supported by low interest rates and generous fiscal spending, HSBC said.

Both Nomura and HSBC say will be watching domestic policy very closely in the second half of the year, but they do not expect monetary easing to be very aggressive, except in China.

Bank Indonesia and the Bank of Korea will keep interest rates steady this week, while the Bank of Japan may announce another 5 trillion yen ($62.8 billion) in asset purchases to keep interest rates at near-zero percent, HSBC said.

On the other hand, HSBC is expecting “a lot more measures” from China, including a cut in banks’ reserve requirement ratios in the very near term. Nomura also expects more easing from the People’s Bank of China, even as the slowdown in China’s economy bottoms out in the second quarter.

“Second quarter GDP growth is likely to be close to the 7.5 percent target set by (policy-setting) State Council,” Zhiwei Zhang, Chief China Economist of Nomura said. “We are approaching the important Communist Party meeting where the leadership transition is scheduled to take place (in November). Therefore, policymakers will likely be much less tolerant of any further slowdown.”

- By CNBC's Jean Chua.

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