News Analysis: Asian economic outlook likely mixed this year despite lower oil prices, U.S. recovery

With the price of crude oil remaining weak and the United States on firmer growth trajectory, the outlook of Asian economies is widely expected to improve this year, but analysts have said that challenges remain and growth may not be uniform across the region.

Lower oil prices should boost demand as cheaper crude imports will likely amount to handy savings that can be better spent on other more productive segments of the economy, some analysts have suggested.

Export shipments to the United States may also gather speed amid the continued recovery in U.S. economy and even U.S. Federal Reserve's monetary tightening later this year is also widely seen as unlikely to trigger an outright financial crisis that many had feared, they said.

CIMB Research said that while the U.S. consumers are still suffering, with a savings rate that is only about 3 percent to 4 percent higher than before the Global Financial Crisis (GFC), there are indications that the savings rate is starting to improve and if that trend continues, it would provide a huge boost to U.S. consumption and expansion, and thus the Asia-wide region should benefit.

For Southeast Asian economies, however, the growth landscape is likely to be mixed this year, said CIMB. While Thailand is expected to outperform, largely due to base effects as growth last year was close to zero, and the Philippines expected to maintain its strong outlook thanks to softer oil price, Malaysia and Indonesia may face headwinds, not only because they are commodity exporters, but also due to a likely slowdown in their domestic demand.

In Malaysia, consumption should soften as high household debt takes a toll and confidence becomes more fragile due to currency weakness, and in Indonesia, the government lacks policy choices. U. S. dollar-denominated debt means that the currency cannot slide too much against the greenback, however, this means that when the currency faces pressure, interest rates need to rise which will inevitably dampen domestic consumption.

Even in Singapore, which boast an economy with the highest per- capita income in the region, CIMB's forecast is that growth is likely to continue to struggle, despite exports expected to increase, as the city-state is currently caught between a slow cyclical recovery and ongoing structural adjustments in its manufacturing sector given rise to increased labor costs.

HSBC Global Research also said lower oil prices and a slightly stronger U.S. recovery will not be enough to lift growth rates in Asian economies back to their more customary pace. While growth in Asia still tops that in many other parts of the world, it is well below what the region has become accustomed to, HSBC GR said.

In emerging Asia, gross domestic product growth has fallen back to a pace last seen in the early 2000s, but unlike then, leverage has continued to climb this time. In other words, the growth process has deteriorated amid slowing advances in productivity, which is an essential ingredient for lasting prosperity.

HSBC pointed out it was lackluster local demand that is holding the region back. Lower oil prices may likely drag instead of boost consumption among some emerging Asian economies, as suggested by some analysts. In Indonesia, India, Malaysia, and to some extent Thailand, for example, recent cuts to fuel subsidies actually mean that consumers have not received as big a boost to their purchasing power as the fall in international oil prices might imply. In all these cases, fiscal savings may eventually be used to raise infrastructure spending that will take time to bear fruit.

As for North Asia, such as Japan, China, and South Korea, HSBC said lower energy prices should have boosted corporate profits but may not necessarily prompt higher wage payments or capital spending, given the uncertain economic outlooks. Unlike the consumer-driven U.S. economy where the impact of changes in oil prices could be large and swift, Asian economies were principally driven by corporate expenditure through wage payments and investment, and this often does not follow as closely to changes in the price of oil. Thus, consumer spending is less sensitive to changes in oil price in Asia than in the United States.

HSBC also added that unless Asian economies adopt bold structural reforms that boost gains in productivity and avoid turning to more fiscal and monetary stimulus efforts that build up debt loads, a general growth malaise that grips Asia at this juncture may persist, with businesses becoming more cautious about investing and consumers less able and willing to spend. This in turn will not bode well with the economic outlook of the region in the long run, HSBC said. Endi