Eye Opener: The shocking truth about Asia’s slowdown

Europe is not the cause of Asia’s slowdown, which began more than a year ago; Asia is, says DBS.

Growth is slowing when measured in year-on-year terms, which is the way virtually all countries in Asia report it. From 11.3% YoY back at the start of 2010, growth fell to 8.5% by the end of that year, to 7.5% by 3Q11 and most recently to 6.9% in 4Q11.

According to DBS, with Europe dominating the headlines since last August, it’s natural to assume that Europe is the cause of Asia’s slowdown. It’s not. Asia, it says, is the cause of Asia’s slowdown, or 90% of it anyway.

Here’s more from DBS:

Production in Asia started to fall back in Jan11. One could even make the case, very reasonably in our opinion, that production in Asia really turned the corner back in early-2010.

Either way, Asia’s ‘slowdown’ has been in the making for a long time – it didn’t start in Aug11 when Europe hit the skids. In fact, as you can see in that chart – and even more clearly in the one below – Asia’s industrial production turned the corner and headed northward again in August, precisely when Europe started to boil over. We’re not saying trouble in Europe has been good for Asia but the data say what they say: production has picked up in Asia, not slowed down, since August when Europe hit the fan. As the traders say, that’s negative correlation.

Does IP show some quirky behavior that is not seen in the economy at large? No. GDP shows the same path as it should. Growth in Asia slowed way back in 1Q11, or if you prefer, all the way back in early-2010, just as IP did. The ‘slowdown’ in Asia is not about Europe, at least in the main.

If Asia’s slowdown isn’t about Europe, what is it then?

Two things: policy and the hard facts of economic life. Policy first: since March of 2010 and all the way up until very recently, Asia’s monetary authorities were tightening policy in an attempt to rein in growth that was too fast and inflation that was too high.

In 2010, Asia’s central banks raised interest rates (or tightened currency regimes in the case of Singapore) 24 times. China lifted its RRR by 300bps to 18.5%.

In 2011, central banks raised interest rates another 24 times. China raised the RRR another 300bps to 21.5%. Beyond the market measures, administrative measures were imposed on property sectors throughout the region.

By the middle of 2011, these policies were having their intended effect. Growth slowed to 5.5% in QoQ terms and inflation, as we now know, peaked in August in YoY terms and 4-5 months earlier in QoQ terms.

The bottom line is, Asia’s slowdown didn’t just happen – Asia’s monetary authorities worked very hard for a year and a half to make it happen.