A Steady Ship

Western economies are inching towards soft landings, and their central banks are reducing interest rates. These developments will be helpful to economies in the Asia-Pacific (APAC) region as they conclude 2024 and look forward to next year. However, the outlook for China remains a central concern.

Exports are doing the heavy lifting as domestic activity in many APAC economies has been constrained by tight monetary conditions or low confidence. Regional inflation has come under control, which should allow some central banks to join the global transition towards easing. Japan and Australia are two exceptions: The former is normalizing through policy tightening, while the latter awaits clearer signals of durable disinflation.

Rising protectionism, the outcome of the U.S. election and China’s stimulus strategy are the themes that will be most impactful for regional markets in the months ahead.

Following are our views on how major APAC markets are poised to perform during the balance of 2024.

Japan

Japan’s economy bounced back in the second quarter with real gross domestic product (GDP) growth of 2.9% annualized, following a 2.4% contraction in the first three months of the year. Signs of passthrough from strong wage negotiation to consumer spending are starting to appear, as private consumption turned up for the first time in five quarters. Business investment increased, led by normalization of auto production. Exports moderated last month, but are likely to remain healthy. A modest expansion led by higher incomes and consumption is our base case for the Japanese economy. Japan’s new prime minister Ishiba has pledged to follow the Kishida administration's economic policy, for now.
The Bank of Japan (BoJ) kept its policy rate at 0.25% at the September meeting. The central bank appears to be in no rush to hike again, following the financial market turmoil after its hawkish tilt in July. Dovish signals were evident in recent BoJ communications. We continue to think that the central bank will stay on hold for the remainder of the year, and foresee only one hike in 2025.

China

The Chinese economy is stumbling amid further loss of momentum. Consumer spending continues to disappoint amid low confidence. The rate of expansion in infrastructure and manufacturing investment has softened. At the heart of China’s economic woes remains the real estate sector downturn. A slowing economy is deepening a deflationary loop, with consumer price inflation only slightly above zero and producer prices deep into deflation. Only exports remain a bright spot, but rising protectionism could worsen overcapacity problems and make deflationary pressures more acute.
The disappointing news on almost all fronts has forced policymakers to turn the tap on more stimulus. However, the scale and composition of easing was still not comparable to that of 2008 or 2016. Recent policy measures included cuts to policy rates, reserve requirement ratios, mortgage rates and one-off cash handouts to the poor. While these measures were cheered by China’s stock markets, the growth picture will not brighten materially without substantial assistance for domestic demand.

Singapore

Growth has remained solid this year, backed by goods exports. Consumers remain cautious, as evidenced by five straight months of stagnant retail sales volumes. While softening labor market conditions have kept households on the sideline in this recovery, signals from the labor market are pointing towards improved momentum. Easing financing conditions should also become supportive of investment and consumption in the coming quarters.
Disinflation remains on track, with the headline measure falling to its lowest level since April 2021. But core inflation (excluding accommodation and private transport) bounced back two-tenths to 2.7% in August, led by higher overseas travel costs. The Monetary Authority of Singapore (MAS) is starting to sound a bit dovish on inflation, but further cooling of underlying price pressures is needed. The MAS is likely to stand pat this year.

Hong Kong

Exports have been the main driver of growth in Hong Kong as well. Domestic demand continues to disappoint, with consumption contracting in the second quarter on an annual basis. The impact from China’s structural slowdown is reflected in the performance of Hong Kong’s real estate and tourism sectors. Retail sales and residential property prices are retreating, owing to weak demand and high borrowing costs. Given the deep commercial linkages with the mainland, we do not expect a quick turnaround of Hong Kong’s economic fortunes.
Easing monetary conditions will support a gradual improvement. Monetary policy has become looser after a 50 basis points reduction by the U.S. Federal Reserve. Given the Hong Kong dollar's peg to the U.S. dollar, the Hong Kong Monetary Authority will remain Fed-dependent.

Australia

Australia's economic growth improved in the second quarter, but was still sluggish at 0.9% annualized. The economy lacks a driver of growth. Households have tightened their belts as real incomes are squeezed. The private sector is also feeling the pinch from restrictive policy settings. Public demand, a resilient labor market and strong immigration have all prevented an outright contraction in GDP, but likely at the cost of stalled progress on disinflation. Below-potential growth is our base case in the balance of the year.
The Reserve Bank of Australia (RBA) continues to defy the global trend of easing. The central bank held rates steady at its September meeting, emphasizing that the Board “is not ruling anything in or out” and that “policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range.” We expect inflation to cool, but not enough for the RBA to pivot as other central banks have done this year. Rate cuts are off the table until next year.

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