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Are we looking at tighter money in Asia in 2018?

Ahead of the Curve, December 18, 2017

One piece of economic news went relatively unnoticed in the lead-up to the Fed’s December rate-hike decision: South Korea’s central bank, the Bank of Korea—often considered a bellwether of interest rates in Asia—had already raised its benchmark rate at the end of November.

It has been a very good year for Asia in economic terms.

  • Japan recorded year-over-year GDP growth of 2.1% in Q3, much higher than its trend rate of growth and the 20-year average growth rate of 0.8%. It is likely to grow by 1.8% in 2018.
  • China grew at 6.7% year over year in Q3, marking 24 months of stability, in which progress has been made towards economic transformation. Retail sales growth in the year to August was 10.1%.
  • South Korea posted 3.8% annual GDP increase in Q3, the fastest rate of growth in seven years.
  • India, which had seen growth slow over the last five quarters, bounced back in Q3 with annual growth of 6.3%.
  • Indonesia grew at 5.1%, in line with trend and target.

It is worth remembering that these five economies together account for 27% of world GDP. Japan, China and South Korea on their own are 23%.

Why the good performance?

  • Taking advantage of subdued inflation in 2014, Asian central banks cut interest rates to boost domestic demand in the wake of slower growth in the global economy (see Figure 1, below). These measures were successful.
  • China and Japan enacted strong fiscal and monetary stimulus in 2016 and 2017. China’s stimulus produced a robust housing market boom.
  • The strong cyclical pick-up in the Euro area that started in 2015, is boosting Asia’s exporters.

inforgraphic 1

What are the consequences?

  • Asia’s growth has been very beneficial for the global economy, which is now performing at its best levels since the global financial crisis.
  • Asia’s property markets have shown good growth in capital values over the last year despite ample new development (see Figure 2, below).1 Leasing volumes are also up across the region, in the year to date, by 6%.
  • Levels of investment activity have surprised on the upside. CBRE’s expectation was that the level of transactions in the region would equal 2016’s, but not exceed it. In fact, year-to-date transaction levels are up 14.6% over the same period last year.

inforgraphic 2

Is the Bank of Korea’s decision to raise rates the start of a tightening cycle?

Yes, but because inflation rates in Asia are subdued, interest rates will not have to rise very quickly. One exception might be China, where there is potential for inflation to pick up quickly in 2018. In part this is due to cutbacks in production capacity, but it also results from credit growth in earlier period due to stimulus. Investors will want to keep an eye on this as the year unfolds, as a potential global risk factor. Note also that Hong Kong is on the same tightening cycle as the U.S.

However, interest rate rises are an indicator of economic buoyancy, and this looks set to continue, albeit with some deceleration in China from mid-year onwards. Growth will continue in Asia for a while yet, at much higher levels than seen in Europe and North America, and this will drive the region’s real estate markets.

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1 Value growth data in Figure 2 have been standardized for global comparison, and may differ slightly from figures reported locally in region.

For more information about this report, please contact:

Richard Barkham, Ph.D.
Global Chief Economist, Head of Global Research & Head of Americas Research
+1 617 912 5215