Asia growth will prove pessimists wrong

Asia growth pessimists expect to score a hat trick against the optimists in 2014 and beyond. We (at Standard Chartered) disagree.

The bearish narrative goes as follows:

Excessive leverage growth has left the region's economies over-stretched, meaning weak growth at best and a potential crisis at worst. Weak or negative productivity performance means soft growth and investment returns. Demand for Asian goods remains subdued despite the recovery in the West, so the external sector will not come to the rescue of the world's most open region to trade.

However, we think these negatives are overblown. First, as with every story, there is more to Asia's leverage story than what the headlines say. Excessive leverage has built up in pockets of some of the region's economies, including the corporate sector in China, South Korea, Singapore and India, and households in Malaysia, South Korea and Singapore. In aggregate, however, we believe the challenges are surmountable.

China's leverage is of greatest concern to us based on a broad range of metrics, but debt is concentrated in the corporate sector and with local governments. China's household sector is in healthy shape and is set to benefit as ongoing wage growth, urbanization and financial-sector development enable households to take on more debt, cushioning consumer spending against shocks.

India and Indonesia, the region's next largest emerging economies, have plenty more room to use leverage sustainably to boost the strength of the consumer. Even in China, we do not expect a crisis. The process of dealing with prior excesses is likely to be manageable, as debt is concentrated in the State-owned and local government sectors rather than the household sector. And monetary easing is already taking place, with the seven-day repo rate now averaging 3.4 per cent, well below its December-January levels.

Second, the perception that Asian economies are driven by capital accumulation, with zero or even negative productivity - defined as the rate of output per unit of input (capital and labor) - is outdated. Asia's productivity performance has been solid across the board since 2000. Even excluding China, the Asia-ex Japan (AXJ) region has outperformed other emerging markets in terms of productivity. This has been achieved even as the capital intensity of growth has declined in AXJ excluding China.