Asia is finally waking up to its inflation challenge. \u00a0Recent weeks have seen a further round of monetary tightening, with a succession of central banks raising interest rates, or taking other measures to put a cap on rising prices. \u00a0India, in particular, has taken tougher action than before, with a large rate hike, whilst others such as China have again pushed up reserve requirements.<\/p>\n
The policy challenge is never easy. \u00a0Is this a case of too little, too late: taking action after inflation has already taken off and when there are expectations of more to come? \u00a0Or is it, too much, too soon – as there are tentative signs the world economy has started to slow, in turn taking the heat out of commodity markets, with food and energy prices easing off?<\/p>\n
The world is two years into an economic recovery. But in many places it doesn’t feel that way. \u00a0This recovery has been led by emerging economies and by policy easing in the West. \u00a0But, it is a divided and disconnected world, as different growth prospects, high rates of unemployment and recent problems in North Africa and the Middle East testify. \u00a0And it is a world of policy dilemmas. \u00a0In the West, where economies are fragile, a double-dip recession is the fear. Across Asia, and large parts of the emerging world, the risks are on the upside: inflation.<\/p>\n
The inflation challenge is greater in Asia for many reasons. \u00a0Last year the region grew strongly, and the slack in Asian economies is far less than in the West. \u00a0Strong domestic demand allows retailers and producers the opportunity to pass on higher costs and to sustain or boost their margins by raising prices. \u00a0Whilst this is a concern, rising wages and good labour market conditions are allowing people to pay higher prices. \u00a0This is akin to a wage-price spiral, albeit in the early stages, but it can get out of hand if not addressed quickly enough. \u00a0Then there is the very issue of food and energy prices itself. \u00a0Higher prices of these staples hit hard into spending and can cause problems, in particular for the poor and those on low incomes. \u00a0Thus, in many countries, there are complex subsidies in place, on areas such as food, fertilizer and fuel. \u00a0These subsidies need to be phased out, but it is difficult politically to do this. \u00a0Although subsidies may ease the pain for some, they complicate the inflation picture, and often add to it.\u00a0<\/p>\n
To these domestic inflation drivers, there is the additional challenge for Asia and for many emerging regions of how to cope with capital inflows. \u00a0This came to the fore as an issue last year, when money flooded in. \u00a0Although less of a concern this year, this may soon change. \u00a0This has been called \u2018America\u2019s year\u2019 by some investors, as the third year of a Presidential term is often good for the US equity market. \u00a0That optimism has been enhanced by the additional stimulus measures America received at the start of this year. \u00a0But now, as policy stimulus wears off, and as debt still needs to be repaid, greater challenges lie ahead.\u00a0 Add in the debt crisis overhanging parts of Europe, and it is easy to see why capital may start flowing back to emerging economies. \u00a0This suggests that the problem of how to absorb capital inflows will again become a key concern for Asian countries.<\/p>\n
Often challenges are most apparent in property prices. \u00a0When money flows in from overseas, it seeks out a home, and all too often this is in equities, or in real estate, adding to existing domestic pressures.<\/p>\n
A recent analysis by Standard Chartered of Asian property prices shows the pressure points. \u00a0That study used the idea of traffic lights to put countries into green, amber and red categories. \u00a0For those in red, prices are already too hot, and policy-makers must stop them.\u00a0 Singapore, Hong Kong and Beijing top this `property bubble-o-metre\u2019. \u00a0For Hong Kong and Singapore,\u00a0this reflects the focus of both economies on the exchange rate, resulting in interest rates being too low for domestic needs. \u00a0Thus, in both places, there is increased use of macro-prudential measures. \u00a0These are targeted policies aimed at curbing property prices and can include, amongst others, controls on loan-to-value ratios and curbs on buying multiple properties. \u00a0China, too, is making use of such measures, as it faces an inflation challenge in its first-tier cities. \u00a0Hence, this year, China is experimenting with property taxes. \u00a0Overall, though, property prices across China are in the amber territory, as indeed they are in many countries across the region.<\/p>\n
Thus Asia faces inflation challenges on two fronts: in asset prices, especially in property and equities; and in general terms, across the whole economy, impacting everyone.\u00a0 Central banks across the emerging world need to avoid the lethal combination of cheap money, leverage, and one-way expectations. \u00a0If they don\u2019t, inflation could take off, initially in property but then across the wider economy. \u00a0This justifies recent policy tightening. It also supports the case for stronger Asian currencies, as economic fundamentals are good and as a way of curbing imported inflation.<\/p>\n
While there are many reasons to be positive about emerging market prospects, nothing can, or should, be taken for granted. \u00a0The business cycle exists. \u00a0Setbacks can occur. \u00a0One fear has been the setback from high oil prices. \u00a0This oil shock has hit relatively early in the cycle, when profit margins are high and monetary policy is not already tight, so there is ample scope for economies to cope.<\/p>\n
Asia should not under-estimate the inflation risks from recent strong growth and the possible fall-out. \u00a0Europe\u2019s failure to cope with the oil price shock in the early 1970\u2019s was followed by a prolonged period of stagnation, in which economies under-performed.<\/p>\n
Not surprisingly, high energy and food costs were a hot topic at the recent annual Asian Development Bank (ADB) meeting in Hanoi. \u00a0This four-day meeting attracted a record turnout of 4,000 people from across the public and private sector. \u00a0The annual ADB meetings provide an occasion to focus on the opportunities and challenges ahead.<\/p>\n
Two years ago, the meeting in Indonesia\u00a0focused\u00a0on the need for Asia to rebalance, by boosting domestic demand. \u00a0Then, three issues were identified: the need for social safety nets, to discourage excess saving; the need to help small and medium-sized firms as they are key for job creation; and the need to deepen and broaden Asia\u2019s bond markets. \u00a0By last year, the focus at the meeting in Tashkent\u00a0was on regional integration and paying for Asia\u2019s huge infrastructure bill.<\/p>\n
All of these issues were important at this year\u2019s meeting, plus there was a strong focus on inclusive growth. \u00a0This can take many facets, such as bringing more people out of poverty. \u00a0The three Asian economies that have witnessed the biggest improvement in Human Development Indices are Nepal, China and Bangladesh. \u00a0Yet inclusive growth is also dependent upon credible macro-economic policies that help keep inflation in check and achieve sustainable growth.<\/p>\n
For Asia, the message should be clear. \u00a0All of these longer-term issues count for nothing if macro-economic policy does not confront the immediate challenges ahead: and the most important of those is the need to address inflation. \u00a0Although there is further to go, recent actions by central banks suggest Asia is moving in the right direction.<\/p>\n
By Gerard Lyons – Dr. Gerard Lyons is Chief Economist and Group Head of Global Research at Standard Chartered Bank<\/em><\/p>\n Stay with Sierra Express Media, for your trusted place in news!<\/em><\/strong><\/p>\n Asia is finally waking up to its inflation challenge. \u00a0Recent weeks have seen a further round of monetary tightening, with a succession of central banks […]<\/p>\n","protected":false},"author":1,"featured_media":75801,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[671,745,1],"tags":[8382,8383,8384,8385,8386,8387,6923,8147],"class_list":["post-23923","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-life-and-entertainment","category-uncategorized","tag-china-and-inflation","tag-domestic-inflation","tag-dr-gerard-lyons","tag-economic-recovery","tag-economies","tag-global-inflation","tag-inflation","tag-standard-chartered-bank"],"_links":{"self":[{"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/posts\/23923","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=23923"}],"version-history":[{"count":0,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/posts\/23923\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=\/wp\/v2\/media\/75801"}],"wp:attachment":[{"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=23923"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=23923"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/sierraexpressmedia.net\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=23923"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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