Asian disinflation ‘entrenched’

Disinflation is becoming “entrenched” throughout Asia, creating economic headwinds and making it tougher for governments to control debt, Morgan Stanley analysts said.

China and South Korea are among seven of 10 major Asian economies excluding Japan that are experiencing producer-price deflation, reflecting a loss of corporate pricing power and weaker commodity prices, analysts led by Chetan Ahya in Hong Kong wrote in a report Tuesday. Officials’ reluctance to ease monetary policy threatens to exacerbate the issue, they said.

Persistent disinflation in Asia adds to global economic challenges including a euro area teetering on the edge of a recession, with the International Monetary Fund last month lowering its estimates of world expansion this year and next. Producer-price deflation is spurring weaker consumer-price gains, slowing nominal gross domestic product growth and pushing up inflation-adjusted interest rates, Morgan Stanley said.

“Against this backdrop and in the context of a rapid increase in leverage almost all across the region over the past six years, this has added to the challenges for managing the debt dynamic in the region,” Ahya and his team wrote. “While policy makers have been slowing debt growth over the past three years, the faster deceleration in nominal GDP growth has meant that debt-to-GDP has moved higher.”

China’s producer-price index fell in October for a record 32nd month, and Barclays Plc sees the decline extending into 2015, as the world’s second-largest economy heads for the weakest full-year growth in more than two decades. Lower oil and metals prices are cutting costs at the factory gate, allowing exporters to reduce prices.

Consumer-price inflation in China was 1.6 percent last month, equaling September’s pace, which was the lowest since January 2010.

Morgan Stanley also cited Singapore, Thailand, the Philippines, Taiwan and Hong Kong as experiencing PPI deflation. Malaysia, India and Indonesia are seeing rising prices, according to the report.

Seven of the 10 Asian economies including China and South Korea also have debt-to-GDP ratios close to or above 200 percent, “a level that warrants close monitoring,” Morgan Stanley said. There are also “risks that the stress in corporate-sector balance sheets is now being transmitted to the consumer,” the analysts wrote.

Ahya recommended tackling the disinflation-related issues through a “quick improvement in capital allocation” as well as monetary easing. One option is to “allow defaults to come to the fore,” which would help “trigger a pullback in credit to unproductive sectors in the system,” according to the report. (Bloomberg)