>DECOUPLING IS BACK (DANSKE MARKETS)

• The recovery in Asia has so far proved exceptionally strong. In most Asian countries with Japan as the main exception industrial activity is now back at pre-crisis level and the output gap has closed much faster than expected.

• Looking ahead, GDP growth in Asia should remain strong in Q4 09. With the output gap closing fast, growth will inevitably slow next year as some of the accommodative fiscal and monetary policy is removed and the recovery in global trade and industrial activity loses some momentum. Besides Japan, deflation is no longer a major threat in Asia.

• With the output gap closing fast, monetary policy in Asia is expected to be tightened earlier and more than in Europe and the US. Only in Japan do we expect monetary policy to be on hold in 2010. In China the central bank is expected to start to tighten monetary policy in Q1 10 and resume the gradual appreciation of CNY.

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The recovery in the wake of the global financial crisis has proved strong so far. Asia is currently witnessing the strongest recovery in industrial activity in modern times, albeit from very depressed levels. With Japan as the main exception, industrial activity in most Asian countries is now back at pre-crisis levels. For Asia as whole, industrial activity is up about 25% from the trough reached earlier in 2009. So far the recovery been just as strong as the downturn and it appears that the output gap is closing fast in Asia, again with Japan as the main exception.

In Asia as a whole, growth in industrial activity slowed to 4.5% q/q in Q3 09 from 6.8% q/q in Q2, mainly because growth in industrial production in China slowed substantially as domestic investment demand levelled off. Momentum in Asian industrial activity in Q3 was strongest outside China, with industrial production in emerging markets excluding China up 4.5% q/q and industrial activity in Japan up a whopping 7.5% q/q. The recovery in industrial production is being underpinned by a strong improvement in global trade. Volume merchandise in exports for Asia as a whole soared 10% q/q in Q3 with few signs of a slowdown compared with Q2. Lower growth in China’s imports appears to have been largely offset by improved import volumes from Japan, Europe and the US.

To read the full report: RESEARCH ASIA