Reserve-rich Asia can afford to turn on the government spending taps should a recent bout of sluggish economic growth deteriorate into a deeper downturn.
For countries counting on exports for growth -- in other words, most of Asia -- overseas demand over the next couple of months may look as shaky as it did in May and June.
A series of manufacturing surveys released on Friday showed export orders weakened, particularly from Europe and the United States. As long as those regions struggle with slack consumption, Asia's trade powerhouses will suffer.
Clearly, we are in for a rough summer, said Frederic Neumann, Hong Kong-based co-head of Asian economics for HSBC, which compiles the monthly manufacturing surveys in Asia.
But Neumann saw some promising signs amid the gloom: inflation pressures are ebbing.
That means if growth doesn't pick up soon, governments will have more leeway to ramp up spending without worrying so much about prices overheating. That in turn takes some of the pressure off central bankers who are struggling to cool inflation without snuffing out growth.
As inflation fades, Asian officials -- and above all Chinese -- will be able to crank the stimulus dial one more time, and lift growth into year-end, Neumann said.
To be sure, Asia's inflation battle is not yet won. Inflation rates are still running well ahead of government targets in China, India, South Korea and elsewhere, even after a nearly 20 percent drop in oil prices since early May.
Core inflation, which strips out volatile prices such as those for food and energy, has been creeping higher.
Low unemployment in the region gives workers more clout when it comes to negotiating wage increases to keep up with rising inflation. But that poses the risk that companies will increase prices to offset higher labor costs, touching off a worrisome wage-price spiral that drives inflation even higher.
That is one reason why economists widely expect further interest rate increases across the region, with India, Malaysia and Thailand among the central banks tipped to hike this month. Taiwan's central bank raised rates last week.
Jan Loeys, head of asset allocation for J.P. Morgan in New York, said even if overall inflation is peaking, as many economists believe, at best it implies a temporary pause, and more likely just a slowing in the tightening process.
Why? Emerging market interest rates are not even halfway back up to the levels seen before the financial crisis exploded in 2008.
Australia is next up with a policy-setting meeting on Tuesday, although economists expect no change in interest rates as growth there shows signs of waning. Retail sales dropped unexpectedly in May, figures on Monday showed.
Malaysia's rate decision is due on Thursday, and it is also expected to remain on hold after raising rates in May. Central bank governor Zeti Akhtar Aziz told Reuters last week that economic growth was still key to monetary policy.
We don't run the economy to the ground just to have price stability, she said.
ONE HAND GIVETH
With an assist from the government's coffers, central bankers would have a better shot at targeting inflation without causing too much collateral damage to growth.
Compared with most advanced economies, Asia is in an enviable position. Unlike the United States, Britain and some other rich countries that are saddled with trillions of dollars in government debt, Asia's big economies boast large reserves and small debt burdens.
In China, for example, the government could compensate for tighter credit conditions by boosting investment in housing. With more than $3 trillion in reserves, funding is not an obstacle.
China's pursuit of loose fiscal policy should outweigh its tight monetary stance, Bank of America-Merrill Lynch economists wrote in a recent note to clients.