Deflation worry overshadows recovery of big economies
CORE COUNTRIES are making progress in recovery but concern about deflation has returned, while the yuan devaluation is triggering worries about China's sharp economic slowdown, which could retard the global economic recovery, according to Bank of Ayudhya.
However, the risk is relatively low for a persistent depreciation trend in the yuan, although this could defeat the move towards market-determined pricing for the foreign exchange market, according to United Overseas Bank.
“The yuan devaluation may raise some hope of China’s improving exports, favouring the countries that are parts of China’s supply chain in the next period.
“However, this unexpected move raises concerns over China’s steep economic slowdown, which could harm the global economic recovery,” Roongsak Satutum, senior vice president and head of BAY’s research department, said in the bank’s “Economic Watch” report yesterday.
The United States’ recovery is on the path that is close to the timing of the rate lift-off. The hikes should begin in December at the earliest given lower-than-expected inflation and more fragile global economy, he said.
The euro-zone economy is likely to improve after concerns ease|d over the Greek debt problem, but deflationary risk and China’s economic slowdown may affect its economy, which still faces structural problems.
Japan’s economy shows some signs of a recovery, but the adverse effects of the Chinese and Asian economic slowdowns may threaten its export sector, while fears of a return of deflation risk have re-emerged.
“China devalued the yuan and changed the calculation of the reference rate by taking greater notice of market forces. Authorities attempted to help the export sector and bring the yuan into the International Momentary Monetary Fund’s special drawing rights basket, which would make the yuan become a global reserve currency,” he said.
“This also sends shockwaves to the foreign exchange, risk assets and commodities markets as well as confidence worldwide,” he said.
The Chinese slowdown and currency devaluation and the Bangkok blast’s effect on tourism have put further pressure on the Thai economy.
“In case a weaker yuan could help support China’s export sector, it should benefit Thai exports because most of them are parts of China’s supply chain.
“However, China’s economic slowdown and its spillover effects currently hurt commodity-exporting countries and export-reliant countries, such as Thailand. In addition, it brings about a rout in currency and risk-asset markets,” he said.
“Given higher risks, 2015 GDP is expected to grow below our forecast of 2.7 per cent,” he said.
UOB’s global economics and markets research unit said the People’s Bank of China (PBOC) has continued to douse depreciation expectations with further macro-prudential measures to saturate speculative activities on the US dollar-to-yuan exchange rate with the imposition of reserve requirements on foreign exchange forwards, options and swaps, as the depreciation view on the domestic currency continues.
There is no doubt that both international factors such as the US Federal Reserve policy direction and weak global demand along with domestic factors, including slow growth and the equity market correction, will exert cyclically downward pressure on the yuan in the near term, but should not be mistaken as long-term structural issues.
“Our interaction with the PBOC recently reaffirmed that the central bank’s FX reforms remain on track and there will be more gradual and orderly liberalisation measures |to come, including further market-determined foreign exchange rates, more two-way volatility, opening of the onshore FX market, extension of onshore FX trading hours, participation of qualified foreign banks in the domestic FX trading system and eventual convergence of the onshore and offshore FX rates,” its “Flash Note” on Wednesday read.
The UOB research team has maintained its 2015 forecast for the yuan to decline 4.8 per cent to 6.50 per US dollar and continue south to 6.56 next year.
