Analysis: Asia's economy heading for "yo-yo" year in 2012

Thu Dec 8, 2011 12:44am EST
 
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By Emily Kaiser, Asia Economics Correspondent

SINGAPORE (Reuters) - Asia's economic growth looks set to stumble over the next few months, prompting a flurry of interest rate cuts and a spike in stimulus spending that may ultimately pave the way for a strong recovery in the second half of 2012.

"The catch-phrase for 2012 is the Asia yo-yo," said Rob Subbaraman, chief Asia economist at Nomura in Hong Kong. "The harder Asia's economies are hit, the stronger the tailwinds for a bounce back."

The idea that bad news would beget good news was a recurring theme in economists' year-end outlooks.

India, Indonesia, Thailand and the Philippines are widely expected to lower interest rates next year. Elections in Taiwan, Malaysia and South Korea may shake loose even more government spending. China will most likely continue cutting banks' reserve requirements to try to spur more lending.

But beyond the basic premise that Asian policymakers will be in easing mode, there was little consensus on how each country would weather the turmoil. Between Europe's simmering debt troubles, concerns about a housing downturn in China, and an uncertain U.S. growth trajectory, there were too many wild cards.

CAPITAL FLIGHT FRIGHT

European banks' claims on Asia, excluding Japan, amount to $1.4 trillion, according to data from the Bank for International Settlements. If Europe's debt problems intensify and its banks retrench, they may pull back some of that credit with little warning, leaving Asia vulnerable to a sudden exodus of capital.

Singapore stands out among the most heavily exposed, with European bank claims amounting to 83 percent of the country's gross domestic product, said Chua Hak Bin, a Bank of America-Merrill Lynch economist based in Singapore. For Malaysia, they add up to 25 percent of GDP.   Continued...