As Asia’s economic growth is still largely export-led, any slowdown in OECD final demand will immediately be felt in Asia. The US consumer remains the primary engine of global growth and so far there are few signs that high oil prices are causing any substantial retrenchment of retail spending. It remains to be seen how resilient they will be if oil stays at current levels, but for the moment most indicators point to continued healthy growth.
Secondly, high oil prices also impact on trade and current account balances. Only Malaysia and Indonesia are net oil exporters of the main market economies in the region, and Indonesia just turned net crude oil importer in June and will likely run a deficit for the full year. Other economies are affected to differing degrees depending on their ability to generate non-oil surpluses. Thailand, Taiwan, India and the Philippines have run trade deficits and their currencies have largely suffered as a consequence. Although Korea, China and Singapore are large net oil importers, non-oil surpluses have more than compensated. Only Thailand, the Philippines and India are expected to run current account deficits this year.
The third main way Asia is affected by high oil prices is through inflation and the potential consequences for monetary policy. Government controls and subsidies dampen the direct effect of higher oil prices on the consumer in Indonesia, Malaysia, China and the Philippines. However, in other Asian countries these higher prices are directly passed through. While this has pushed up headline inflation in most countries, with the exception of the Philippines and Thailand, core inflation has remained relatively subdued. Therefore, while some central banks have paid lip service to concerns about rising headline inflation, most have not felt the need to follow-through with more than token interest rate increases.
In conclusion, as long as the US economy is able to maintain healthy growth, high oil prices should not have a large negative impact on Asia’s growth prospects. The main way sustained high oil prices will cause performance divergence at a country-level is through the balance of payments. Countries that are large oil importers and do not have sufficient trade, services or capital inflows to compensate will likely see downward pressure on their exchange rates, higher interest rates and sub-par growth.
Nick Brooks, senior economist, Henderson Global Investors.
