The Impact of U.S. Monetary Normalization on Emerging Asia GDP Growth

April 06, 2016 |Author: EGA Investment Strategy | Categories: Chart of the Week, Emerging Markets

The impact of U.S. monetary normalization will be moderate on Emerging Asia. The Organisation for Economic Co-operation and Development (OECD) 2016 outlook, like many other sources, projected growth in the Emerging Asia region (Southeast Asia, China and India) above 6% in both 2015 and 2016, led by India, at above 7% in both years. The OECD noted, “There are good reasons to expect that U.S. monetary tightening will not have such disruptive effects on Emerging Asia. The tightening has been anticipated and is unlikely to surprise markets, unless it turns out to be significantly larger than the increase of 25 basis points now expected. The criteria determining the timing of the rate rise are also widely understood. Long-term U.S. interest rates may well rise somewhat as policy rates increase, but probably by considerably less initially than occurred during the 2013 taper tantrum¹.”

The net effect on GDP. According to the results of the OECD simulation, the increase of 25 basis points would lower the gross domestic product (GDP) of the Emerging Asia as a whole by 0.56%. The impact is likely to be 0.68% of GDP, if the U.S. tightening were to lead to increases in U.S. long-term interest rates that are larger and faster than those during the 2013 taper tantrum.

¹OECD, Economic Outlook for Southeast Asia, China and India 2016, November, 2015.

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