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Shifting the Balance. Bank Distress in US, Europe to Make Asian Outperformance More Compelling

The recent turmoil and distress in the banking sector in Europe and the US will only serve to make outperformance of Asian economies more compelling, with India among the ones fuelling that growth, according to a Morgan Stanley report.

The US-based investment bank has been saying for some time that Asia will be an outperformer. With their banks in disarray, Europe and the US are likely to tighten their lending standards, putting the brakes on domestic demand. While this may have a spillover effect on Asia in terms of external demand recovery being constrained, the domestic demand in the economies in the region should be enough to shift the balance in favour of the continent.

“By 4Q23, we expect Asia’s growth to be 500 bps higher than DM (developed markets) growth – the strongest since 2017,” Morgan Stanley said.

Major growth drivers

One of the reasons for the region’s outperformance is that on average in Asia, domestic interest rates have not risen as much as in the developed markets. For instance, policy rates have gone up by 475 basis points in the US, 350 bps in the Euro zone, while it is just 100 bps in Asia.

“This means that the sacrifice in domestic demand should be much smaller in Asia,” the report said.

The second major driver will be China’s reopening which will boost demand in the economy and have a spillover effect on other countries in the region. The Chinese government has also adopted a ‘pro-growth’ stance. The rapid reflation in the property market and secondary sales going back to 2021 levels should be seen as signs of a recovery in consumer confidence, Morgan Stanley said.

The third engine of growth will be Japan, India, and Indonesia where domestic demand is on the way to revival.

In India, for instance, private sector companies have cleaned up their balance sheets and they are primed for a ‘healthy risk appetite for expansion.” For decades, India has suffered from supply-related bottlenecks. However, recent supply-side reforms are enabling the country to gain market share in global goods and services exports, “thus catalysing employment and investment,” it said.

Japan has accommodative macro policies that should support private sector demand, while Indonesia has managed its macro stability risks, and rates have not risen as high as other emerging market economies, keeping demand buoyant.

Other markers

Elaborating on India, the report pointed out that corporate debt ratios are at a 15-year low, while the banking system’s non-performing loans are at an 11-year low. This is helping to unlock a capex cycle and public capital expenditure is near an 18-year high, while private projects are seeing a rebound. Public capex is estimated to rise to 3.3 per cent of GDP by the end of March 2024.

There are other growth markers too. While manufacturing capacity utilisation has exceeded pre-Covid levels, GST collections have also continued to pick up. Even though goods trade deficit has widened, services trade surplus has been growing. The pickup in services exports will be an important offset to higher oil imports.

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