Will Hard Landings in Asia Worsen Global Deflationary Situation?
Hard landings in Asia
The economic slowdown in Asian economies at an unacceptable rate relative to inflation and unemployment is signaling hard landings. The major Asian economies such as China (YINN) (MCHI), India (INDA), and Japan (EWJ) (DXJ) showed a slowdown in economic activity. In 1Q16, China’s economy grew by 6.7%, India’s economy grew by 7.9%, and Japan’s economy grew by 0.5%. These figures showed little improvement and were in line with market expectations. However, these figures represented huge falls compared to the previous quarters.
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The fall in domestic and overseas demand was the major reason behind the weak performance in Asian countries. The ongoing global currency war is another factor. China devalued the yuan twice in August 2015, which spooked equity markets around the world.
International trade was also affected. International trade is largely dependent on exchange rates. If a country’s currency is depreciating, it should lead to a rise in exports and a fall in imports. If a country’s currency appreciates, the reverse should happen. Countries with lower inflation levels usually represent stronger currencies. However, in recent months, movements in the exchange rate haven’t been determined by inflation but by factors such as the fall in commodity prices and the aftermath of credit risk.
Moreover, the fall in commodity demand in China’s domestic consumption has led to a downturn in commodity prices. The downturn in crude oil prices due to the supply glut in the past two years as well as the fall in other commodities have led to a deflationary situation across the globe.
In the next part, we’ll analyze George Soros’s new investment strategy and what an investor should do when global uncertainties rise.