Shanghai's World Financial Center - - China's tallest building

Asia was the first region to emerge from the Great Recession last year. It is also the first region where the incoming data justify a forecast upgrade this year according to US investment bank Morgan Stanley, which has  boosted its 2010 GDP growth forecasts for Japan (by 1.4%), China (1%), India (0.5%), Malaysia (0.5%) and Thailand (0.3%). The bank now see Pan-Asia motoring along at a 7.4% pace (from 6.6% previously) and Asia excluding Japan (AxJ) at 8.8% (previously 8.2%). The main trigger for this upward revision was a stronger-than-expected surge in external trade around the turn of this year, which should also lead to stronger capex (capital expenditure) and, especially in India, a better outlook for domestic demand. The region will be responsible for 60% of  global growth of 4.4% in 2010 and the world's Emerging Markets will be responsible for 75% of growth.

Now looking for 4.4% global GDP growth in 2010 ... The Asian upgrade, along with some minor changes elsewhere, pushes the MS 2010 global GDP forecast up by almost half a point to a solid, above-consensus 4.4%, from 4.0% previously.  MS says even though Asia's share in global GDP is only slightly above 30%, it will account for no less than 60% of global GDP growth this year.

... slowing to 4% in 2011: The view on 2011 has barely changed with global GDP forecast to rise  marginally to 4%, from 3.9% previously.  Factoring in a stronger 2010 outlook, MS now forecasts a more accentuated fading of global growth momentum in 2011, reflecting less monetary and fiscal stimulus as well as the lagged effects of the sharp rise in long-term interest rates that is expected this year (which, admittedly, is still a forecast). MS says the risks to the 2011 outlook are probably skewed to the downside, as several countries in the developed world might be forced into a sharper fiscal tightening than currently anticipated.

Amplifying the MS five global themes: the Asian forecast upgrade serves to underscore the five global economic themes it says it has been highlighting in recent months.

1. A tale of two worlds: This theme, which juxtaposes strong growth in emerging markets versus tepid growth in the advanced economies, shines even more brightly with the Asia growth revisions. MS now sees output in the EM (emerging) economies growing by close to 7% this year, from 6.5% previously. Thus, the EM universe contributes fully 75% of the 4.4% global GDP growth it forecasts for 2010, against a meagre growth contribution of 25% from the advanced economies.

2. BBB (bumpy, below-par, boring) recovery in G10: MS now forecasts significantly higher GDP growth in Japan - - 1.8% compared to 0.4% previously - - and it has abandoned the call for a double-dip in Japan in the first half of this year. However, looking at the advanced economies as a whole, the economists expect this recovery to be bumpy, below-par and boring overall, with GDP in the G10 rising at only just over 2.2% (against 2.0% previously). 

3. G3 (US, Europe, Japan) growth differentiation: With the latest forecast revision, Japan has passed on the red lantern in terms of growth within the G3 to Europe, where MS continues to see GDP growing by a sluggish 1.2% this year.  However, the MS view that growth differentials within the G3 are likely to garner more attention this year remains unchanged, as it continue to see the US leading the pack with a 3%+ growth rate this year. It expects Europe to lag behind, mainly because the bulk of the labour market adjustment is still to come there and because credit availability is likely to be lower than in the US, where credit markets as opposed to banks play a larger role in financing the economy.

4. AAA liquidity cycle remains intact: While MS now expects China to start hiking official interest rates already in Q2, and thus one quarter earlier than previously thought, the big picture hasn't changed: central banks around the world are more likely to crawl rather than rush towards the exit. Any tightening is likely to be gradual and cautious, and short rates are likely to stay well below neutral levels in the foreseeable future. Hence, MS expects liquidity in the hands of consumers, investors and companies to remain ample, abundant and augmenting.  

5. Sovereign and inflation risks up: The sovereign risk theme has already started to play out with the Greek fiscal drama, and is now in the process of widening out to other European countries. While the Asian forecast upgrades do not affect the sovereign risk theme directly, they underscore the second part of the theme - - rising global inflation risks. In fact, the MS 2010 CPI inflation forecast in the AxJ region has gone up from 3.7% to 4.1%, and the Asia team believes that risks to this forecast are still skewed to the upside, given the pick-up in growth momentum and strong capital inflows into the region.

China:

Upgrading 2010 Forecasts on Improved External Outlook

Japan

Economy Gets Better, Deflation Gets Worse: Upgrading 2010 Forecast 

India

Towards a Higher Growth Path

ASEAN

Outlining the Themes and Realigning our Views