European and US woes to hit Asia, but soft landing tipped for China

A recession in Europe next year, combined with a slowdown in the US economy, will be a drag on Asia’s growth next year, but China will endure a relatively soft landing and the value of the renminbi will remain flat, according to Bank of America Merrill Lynch.

“As a market [and] a region of the world that is still very much driven by global demand, Asia will be impacted by the slowdown in Europe and the weak environment in the United States,” says Nigel Tupper, head of Asia-Pacific strategy and chief global quantitative strategist at BoA Merrill.

“In Europe, we are forecasting a recession in 2012 on the back of austerity measures, tighter credit conditions and also the fear of sovereign defaults,” he adds. “We’re not forecasting a recession in the United States, but we aren’t expecting a very strong environment either, with approximately 2% GDP growth [next year].”

A bright spot in Asia is expected in the form of easing inflation, which will lead central banks to cut interest rates. “[We’ve] started to see that already in many countries around the region,” notes Tupper. “Although it’s a slowing environment, lower interest rates will prove to be positive, longer term.”

While China will benefit from a break in inflation rates – which for consumers is expected to drop to 3.5% in 2012 from 5.5% this year – a deceleration in exports to Europe will be a leading factor in a soft landing for the mainland, says Ting Lu, Greater China economist at BoA Merrill.

This is in line with the consensus, as only 17% of respondents to BoA Merrill’s monthly fund manager survey, published yesterday, predict a hard landing (sub-7% growth) for China.

“Trade surplus next year will greatly shrink,” adds Lu. “Exports will be affected by [a recession-hit] Europe, but import growth will be mainly driven by China’s domestic demand.”

The bank forecasts China’s GDP growth to slow next year to 8.6% of GDP, down from about 9.2% in 2011.

While exports and inflation are also set to fall in China, the value of the renminbi against the dollar will stay the same, predicts Lu, noting that the greenback has strengthened against most global currencies over the past few months. “To conclude: no appreciation, no depreciation."