By Shamim Adam, Bloomberg
Singapore: Asian economies including South Korea and Singapore are likely to expand at a slower pace in the first quarter as easing export orders curb production and consumer confidence ebbs, according to Capital Economics Ltd.
The slowdown in growth may give Asian central banks room to reduce interest rates, wrote London-based economist Keith Gyles in an e-mailed report.
In India, “the recent weakening of the manufacturing PMI suggests growth is set to slow sharply over the next month or two,” Gyles wrote. Singapore’s “electronics Purchasing Managers’ Index (PMI) has also dropped sharply since the end of last year, perhaps signaling a downturn in the global electronics cycle. Exports are already suffering.”
Declines in the PMIs in India and Singapore may portend a slide in growth in the months ahead, the report said. Output in both economies has slowed as orders for goods for domestic and overseas markets dropped.
Production has also eased in Malaysia and manufacturing activity in the Philippines is “soft,” according to Capital Economics. Malaysia will see “a sharper deceleration in gross domestic product (GDP) growth in the first quarter of this year,” Gyles wrote.
“Across Southeast Asia, the prospect is for further rate cuts over the next few months, driven by slowing growth, fading inflation concerns, and local currency strength against a globally weak dollar,” Gyles said. “We expect rates to be falling in Korea by the end of the year as well, as the economy slows and concerns about the booming housing market ease.”
South Korea’s economy last quarter grew at the slowest annual pace in 18 months as exports dropped and spending remained sluggish, the central bank said today.
South Korea’s $887 billion (Rs38,77,041 crore) economy grew a revised 0.9% in the fourth quarter, after gaining 1.2% in the previous three months, the central bank said. The economy expanded 4% from a year ago.
South Korea’s export outlook is “not as bright” as expected amid signs of cooling US growth and a rout in global stock markets, Commerce Minister Kim Young Ju said last week. The nation’s overseas shipments increased at the slowest pace in four months in February on fewer sales of computer parts and home appliances.
A global equity sell-off erased $3.3 trillion in market value between 27 February and 5 March, triggered by a decline in Chinese shares and on concern over the extent of the slowdown in the US economy, threatened by a mortgage crisis.
Bank of Korea Governor Lee Seong Tae may cut the overnight call rate to as low as 3.5% by the end of the year, from 4.5% now, Gyles predicts.
“The slowdown in the domestic economy has helped keep inflation under control,” he wrote. “With tentative signs that the housing market is now starting to cool, we still think the next move in official rates will be down.”
The central bank in recent months has focused on slowing lending growth and a surge in house prices. The property market is stabilizing on measures to rein in borrowing and help cool price gains, Finance Minister Kwon Okyu said on 15 March.
Growth in the Philippines may pick up after a slowdown this quarter as lower interest rates and higher wages spur domestic consumption, the report said. Gains in the peso have pushed inflation to the lowest in four years.
“The central bank has a good case to start cutting interest rates soon,” Gyles said. “This might provide some support to the stock market, which has been hit by the turmoil in global financial markets.”
Philippine central bank Governor Amando Tetangco last week said borrowing costs are not likely to be lowered because record amounts of cash sent home from Filipinos abroad risk fanning inflation. The last rate cut was in July 2003.
Floods in Indonesia’s capital of Jakarta and earthquakes in the Sumatra province dented confidence among consumers who were expecting the natural disasters to push up food prices. The index has declined every month since November, suggesting growth in the $351 billion economy may slip in the first three months of 2007, Gyles said.
A lack of investment will restrain economic growth this year, Finance Minister Sri Mulyani Indrawati said yesterday, forecasting an expansion of 6% from an earlier target of 6.3%.
In Thailand, terrorist attacks, investment curbs and political discord have also led to a deterioration in consumer and business sentiment. An index measuring confidence for the future dropped in February to the lowest in more than five years.
“This offers little hope that there will be a pick-up in consumer spending over the near term,” Gyles said.
More Rate Cuts
Policy makers in Southeast Asia’s two largest economies are not done cutting rates yet, Capital Economics said. Bank Indonesia lowered borrowing costs this month for the 10th time since May, while policy makers at the Bank of Thailand have cut rates twice this year.
Bank Indonesia Deputy Governor Aslim Tadjuddin on 16 March said he sees “big” room for the central bank to reduce its key rate as inflation slows. Rates have already been lowered by 3.75 percentage points to 9%.
Thailand’s benchmark rate may end the year at 3.5% from 4.5% now, Gyles predicts.