Glenn Maguires Asia Sentry Dispatch

July 26, 2012

Asian growth has inexorably crawled back to 2008-09 levels.

The Q2 GDP outturns and our forecast for Q3 GDP based on the very preliminary partial data released to date reveals that the modest deceleration in economic activity that commenced in H2-2011 has now extended for a significant enough duration that growth has now slowed to the the same levels as seen in the immediate 2008-09 postpcrisis period. The key difference is the speed of the adjustment. Whereas in 2008-09 growth retrenched sharply in one-to-two quarters, in this more prolonged adjustmenet growth has corrected from recovery levels to crisis levels over the course of four-to-six quarter. Still, the end point is what we must focus on. Growth has retrenched to levels in Asia where unemployment rates will be rising, inflation falling as output gaps widen, and central banks in the emerging markets will have no choice but to reduce their nominal interest rate buffers and move their policy rates closer to the zero nominal bound.

South Korea Q2-12 GDP slowest growth rate since Q3-2009.

Though South Koreas economic growth over the year to Q2-12 was only slightly lower than the consensus expectation of 2.5%, at 2.4% actual, there was a significant slowing in growth from the 2.8%YoY reading in Q1-12. As always, the sequential seasonally adjusted quarterly profile is more illustrative. Growth momentum eased to 0.4%QoQ from 0.9% in Q1-12. The weakening in the growth profile has almost been evenly distributed between slowing private consumption, fixed asset investment and exports basically most of the expenditure components of growth. In immediate response to the figures, a number of IBs reduced 2012 growth estimates by a full 50bps to 2.7% year-average. Asian and emerging market central banks will most probably consider unorthodox policy prescriptions rather than driving the nominal policy rate to zero. Following the surprise 25bp cut in Korean rates in July, a further BoK rate cut now seems likely as early as August. However, we would expect Asian central banks in particular, and emerging market central banks in general, to probably introduce unorthodox or quantitative monetary easing sooner rather than later, rather than allowing the nominal

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory. cash rate to slip problematically close to zero as the worlds major developed central banks did. De-facto quantitative easing by the emerging market central banks should lead to some debasement of emerging market (largely cyclical) financial assets in concert with the same downward pressure on cyclical asset prices we see coming from the global retrenchment in trade now underway.

Dont hang your hat on the one figure that bucks the trend
Singapore industrial production rose by a hefty 3.9%MoM in June, bucking the regional trend of disappointing outturns. Singapores industrial production figures quite often post abberant prints as pharmaceutical production lines are curtailed and new ones rolled-on. Pharmaceutical production increased by 68.7% over the month of June (probably not a Xanax led recovery). Those sectors much more closely aligned with the global production and trade cycle were very weak. Electronics production, for instance, was down by 4.5% from a year earlier. Only in North Korea Kim Jong Un, arguably one of the least attractive of the fairly austere bunch of world leaders, has taken a wife. . The woman thought to be Kim Jong-Uns new wife is famous for singing a song called Excellent Horse-Like Lady. News agencies on the Korean peninsula have yet been able to attribute the song to any recognisable person.

Todays Conclusion: The tangent of the decline in the Asian growth profile has been much flatter in Q3-2011 to Q2-2012 than what we saw in Q3-2008 to Q2-2009. Still, the end points are now roughly the same. Asian regional growth as weakened to levels not seen since the global financial crisis. As Asian central banks are likely to consider introducing unorthodox (or quantitative) easing measures sooner rather than later, we would look for a range of cyclical and Asian asset prices to come under downward pressure.

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Sentry Dispatch: The High Frequency Letter of Asia Sentry Advisory.

Asia Sentry Advisory Pty Ltd Suite 9, Level 40, Northpoint Tower 100 Miller Street, North Sydney, NSW, 2060, Australia. Ph: +61 2 9931 7820 Fx: +61 2 9931 6888 M: +61 401 548 820 www.asiasentry.com gbmaguire@bloomberg.net glenn@asiasentry.com

Asia Sentry Advisory Pty Ltd is a boutique economic consultancy established to meet the growing demands of clients seeking greater exposure to the most dynamic economic region in the post-crisis global economy, Asia. Asia Sentry Advisory marries keen judgment with a rigorous model-based approach and a deeply intuitive understanding of Asia that can only come from on-the-ground experience to deliver market out-performing analysis and forecasts.
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