SINGAPORE (June 24): The current bout of deflation in Asia is likely to be temporary and investors should indeed expect lower prices in the region to eventually support domestic demand in the affected economies says Daniel Martin, Asia economist for London-based economic consultancy Capital Economics.
“Deflation in Asia should still be viewed as a temporary bout of “good” deflation,” he says.
His pronouncement comes hours after Singapore reported that its Consumer Price Index all item inflation edged up to -0.4% in May from -0.5% in April as a result of higher cost of private road transport.
Excluding private road transport and accommodation costs, the Monetary Authority of Singapore’s measure of core inflation fell to 0.1% y-o-y from 0.4% in April.
A number of Asian economies including Singapore, Taiwan and Thailand have been experiencing deflation while Korea has flirted with deflation for months now, reinforcing the view that a lasting and damaging period of falling prices lies ahead, Martin notes.
The Singapore-based economist argues that investors shouldn’t fret over the seemingly growing deflationary pressures in the region.
“Good” inflation, he notes, is caused by an external or supply-side shock and can help boost demand in an economy by putting more money in the pockets of consumers and raising corporate profits.
“Bad” deflation, on the other hand, is a symptom of a severe shortage of demand, Martin notes.
“It can deepen and prolong demand weakness if it results in a fall in inflation expectations and lower income growth,” he argues.
In case of Singapore and other deflation-plagued economies of the region the direct effects of lower energy prices have undoubtedly played a major role in pulling down inflation, the Capital Economics’s Asia economist argues.
“If energy prices had been flat over the last year, inflation would have been positive, (even) if it was low, in all of these economies," he notes. Indeed, in Singapore, inflation would have been only fractionally above zero.
Core inflation has also been on a downward trend in Singapore, Taiwan and Thailand, but it is not unusually low by historic standards in any of them except Singapore, where other supply-side factors have been at play.
“There is little other evidence that deflation is being caused by a shortage of demand,” Martin said in report on Asian economies published today.
“Labour markets are very tight in all four economies, wage growth remains positive and GDP growth is generally in line with estimates of potential growth.”
Though consumers have not so far rushed out to spend their windfall from lower oil prices, but they have not cut spending in anticipation of future price falls either.
“As the impact of downward pressure from lower energy prices starts to fade towards the end of the year, we expect all of these economies to exit deflation,” Martin said.
