Morgan Stanley has a a report out today on Asian growth prospects next year that I think is right:
Where are we in the growth cycle? After decelerating throughout the first half of 2013, the region’s GDP growth improved slightly in 3Q13, to 6.2% YoY from 6.0% YoY in 1H13. However, this recovery has been uneven both across countries and expenditure components. On a YoY basis, GDP growth accelerated in 3Q13 relative to 2Q13 in China, India, Korea, Malaysia and Singapore, but decelerated in other economies. Across the region, though external demand has improved, the trend in domestic demand remains subdued. Within domestic demand, investment, which historically has been tightly linked to exports, appears to be holding up better than consumption.
What are our forecasts now? Our global economics team expects global GDP growth to improve to 3.4% in 2014 from an estimated 2.9% in 2013 (see Global Economics: 2014 Global Macro Outlook: Five Key Transitions, by Joachim Fels et al., December 2, 2013). This improvement in global growth remains centred around accelerating growth in DM. Despite this improving global growth environment, we expect AxJ GDP growth to stay flat at 6.0% in 2014, for two reasons. First, domestic demand will face twin constraints: a higher starting point of leverage than before, and higher real rates. Second, though external demand is expected to improve, it will remain structurally weak due to weaker positive spillover effects from a US recovery and a loss of external competitiveness.
Bear and bull scenarios: Risks to the region’s growth outlook remain finely balanced.
In our bear case scenario, GDP growth would decelerate to 5.4% in 2014. Higher bond yields, weaker global growth, and a drop in export volumes would weigh on the region.
In our bull case scenario, a faster than expected pace of private sector growth in the US and also a decisive pace of announcement and implementation of policy reforms in the region would lift GDP growth to 6.7% in 2014.
Bottom line: We believe that the region’s macro outlook will remain challenging in 2014. Our framework for assessing this has been and remains the trend in real rates and real GDP growth. As it is, the gap between real GDP growth and real rates has already narrowed to a decade low.
In our base case outlook, we expect AxJ GDP growth to remain flat at 6.0% in 2014. In other words, even if real rates were to remain at current levels, we are not likely to get a situation where the gap between real GDP growth and real rates would widen, as it did over 2003-07.
And on China:
China has played a key role in the region’s development over the last three decades. The region’s dependence on China has also increased sharply over the last five years as China emerged a key source of end demand at a time when the US, Europe and Japan slowed significantly after the credit crisis.
The slowdown in China’s growth will be transmitted to the rest of the region largely via trade and commodity price linkages: In China, we believe that headwinds from tighter financial conditions will likely tilt the risk to the downside for domestic demand growth, and this will exert downward pressures on the rest of the region’s growth outlook due to the spillover effects via trade flows and lower commodity prices. A slowdown in China’s domestic demand will slow import growth and will have an attendant impact on the export growth of its trading partners. Within the region, the economies that have the highest direct trade exposure to China* are Taiwan, Korea and Singapore. Hong Kong’s role as a regional trading hub will mean that it will also be affected by a slowdown in China. Slower growth in China, one of the world’s largest consumer of commodities, implies a slower growth rate of consumption of commodities as well, putting downward pressures on prices. In this context, the net commodity exporters in the region such as Indonesia and Malaysia will be most affected.
The report does not cover Australia but if it did it would find we are also at risk: