With most countries in an unlock mode after the stringent lockdown triggered by the Covid-19 pandemic over the past few months, Nomura expects an uptick in economic growth rates as measured by the gross domestic product (GDP) for most Asian countries in the second half of calendar year 2020 (H2-2020) as compared to the second quarter lows, but cautions that the pace of recovery will vary across regions.
While collectively, emerging market (EM) economies have entered their deepest recession in at least 60 years, Asia – particularly China and Northeast Asia – stand out as the best in a bad bunch in terms of prospects for a strong recovery, Nomura said.
“We reach this conclusion by examining data on the resiliency to COVID-19, propellants of a growth revival – in addition to policy stimulus, Asia has in its favor the growth pole of China, low oil prices and solid global tech demand – and the scope to attract a bonanza of capital inflows as the global hunt for yield gains momentum, possibly with more intensity than ever before,” Nomura said.
Divergent growth
The divergence in economic growth across the Asian region, according to Nomura, will be based on four key factors – Covid-19 containment, policy response from the respective governments of the countries in the Asian region and the other key policy-makers, exposure to the tech cycle and China's credit impulse.
Among regions, Japan, Australia, China and Asia (ex-Japan, Australia) and the Asian region as a whole have seen a revision in the real GDP growth forecast for 2020 and 2021. (See table)
table
“In China, South Korea and Taiwan, Nomura expects quarterly GDP growth to return to positive territory year-on-year (y-o-y) within 2020, but growth rates elsewhere will likely remain negative until early 2021, reflecting a much slower path back to normal. We are positive on North-east Asia and negative on South-east Asia and India,” wrote Sonal Varma, managing director and chief India economist at Nomura in a July 10 co-authored report with Ting Lu, Euben Paracuelles and Jeong Woo Park.
This divergent growth path, Nomura says, should also lead to policy divergences from the respective governments and key policy makers over the next few months.
“We do not expect further policy support in South Korea, Taiwan, Thailand and Singapore, but more will be needed elsewhere. We expect additional rate cuts in India (50bp) and in the Philippines, Indonesia and Malaysia (25bp each). Emerging Asia will also need more fiscal support,” Varma wrote.
tableWord of caution
Despite the recovery picking up pace, Nomura believes there still are three key underlying fragilities that can dent the recovery process. The labour market has continued to weaken over the past few months as reflected in rising unemployment rates, an increasing number of underemployed and declining number of hours worked and wages. Once the pent-up demand fades, Nomura believes higher income uncertainty may result in a more frugal consumer.
Second, corporate profitability, according to Varma, is under pressure, as reflected in a rising ratio of credit rating downgrades to upgrades. “The most rapid deterioration in corporate credit quality has taken place in China, Hong Kong and India, and this could cascade into corporate bankruptcies, delay corporate capex plans or spill into the labour market,” Nomura said.
Lastly, the impact on bank asset quality is still an unknown owing to the loan moratoriums offered to borrowers by banks and the regulatory relief offered to banks. Over the next year, Nomura expects banks to undergo higher provisioning, increased credit costs and will likely need to dip into their capital buffers.
While collectively, emerging market (EM) economies have entered their deepest recession in at least 60 years, Asia – particularly China and Northeast Asia – stand out as the best in a bad bunch in terms of prospects for a strong recovery, Nomura said.
“We reach this conclusion by examining data on the resiliency to COVID-19, propellants of a growth revival – in addition to policy stimulus, Asia has in its favor the growth pole of China, low oil prices and solid global tech demand – and the scope to attract a bonanza of capital inflows as the global hunt for yield gains momentum, possibly with more intensity than ever before,” Nomura said.
Divergent growth
The divergence in economic growth across the Asian region, according to Nomura, will be based on four key factors – Covid-19 containment, policy response from the respective governments of the countries in the Asian region and the other key policy-makers, exposure to the tech cycle and China's credit impulse.
Among regions, Japan, Australia, China and Asia (ex-Japan, Australia) and the Asian region as a whole have seen a revision in the real GDP growth forecast for 2020 and 2021. (See table)
table
“In China, South Korea and Taiwan, Nomura expects quarterly GDP growth to return to positive territory year-on-year (y-o-y) within 2020, but growth rates elsewhere will likely remain negative until early 2021, reflecting a much slower path back to normal. We are positive on North-east Asia and negative on South-east Asia and India,” wrote Sonal Varma, managing director and chief India economist at Nomura in a July 10 co-authored report with Ting Lu, Euben Paracuelles and Jeong Woo Park.
This divergent growth path, Nomura says, should also lead to policy divergences from the respective governments and key policy makers over the next few months.
“We do not expect further policy support in South Korea, Taiwan, Thailand and Singapore, but more will be needed elsewhere. We expect additional rate cuts in India (50bp) and in the Philippines, Indonesia and Malaysia (25bp each). Emerging Asia will also need more fiscal support,” Varma wrote.
tableWord of caution
Despite the recovery picking up pace, Nomura believes there still are three key underlying fragilities that can dent the recovery process. The labour market has continued to weaken over the past few months as reflected in rising unemployment rates, an increasing number of underemployed and declining number of hours worked and wages. Once the pent-up demand fades, Nomura believes higher income uncertainty may result in a more frugal consumer.
Second, corporate profitability, according to Varma, is under pressure, as reflected in a rising ratio of credit rating downgrades to upgrades. “The most rapid deterioration in corporate credit quality has taken place in China, Hong Kong and India, and this could cascade into corporate bankruptcies, delay corporate capex plans or spill into the labour market,” Nomura said.
Lastly, the impact on bank asset quality is still an unknown owing to the loan moratoriums offered to borrowers by banks and the regulatory relief offered to banks. Over the next year, Nomura expects banks to undergo higher provisioning, increased credit costs and will likely need to dip into their capital buffers.
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