ASIAN ECONOMY: In slow motion
Asia’s economy is slowing. By how much depends as much on the rest of the world as on domestic policy choices
Asias period of breakneck expansion is coming to an end. Its unprecedented recovery following the global financial crisis is now succumbing to weak global demand, with the eurozone facing recession and the economies of China and India losing momentum.
The Asian Development Bank says that GDP growth for developing Asia will ease to 6.9% this year, from 7.2% last year and slightly over 9% the previous year, before recovering somewhat in 2013, as the region adjusts back towards a more sustainable long-run growth path, the bank said in its recent Asian Development Outlook.
While such expansion is still formidable compared to that of the industrial world, Asia remains acutely vulnerable to global shocks.
For ADB chief economist Changyong Rhee, the greatest uncertainty at this moment is over what will happen to the eurozone.
The bank forecasts a fiscal austerity-induced 0.5% contraction in the overall eurozone economy this year. But Rhee says this is based on the assumption that there wont be any immediate deterioration in the eurozone problem, and that the sovereign debt problem of large European countries will not worsen for a while.
If large European countries have another round of sovereign debt crisis and Europe goes further down than minus 0.5%, then I think its going to be very messy [for Asia].
The IMF, too, cautioned in its April 27 Regional Economic Outlook (for Asia and the Pacific) that Asia remains exposed to any escalation of the difficulties in Europe. In particular, a sharp fall in exports to advanced economies and a reversal of foreign capital flows would severely impact activity in the region, the report said.
The impact of the eurozone problems on Asia will be felt mostly through trade channels but if a bad scenario develops, it is not just trade but also the financial channel that will be affected, Rhee notes. Deleveraging by European banks is underway, but the gap left by European banks in Asia is being filled by US and Japanese banks. So, we dont see any problem at this moment.
NO END IN SIGHT
Rhee, like many economists, says that despite moderating since the end of last year, an end to the eurozones woes is not yet in sight. It will be a bumpy road with the political situation and [questions over] whether the European leaders will commit to their promises already made, he says. This will be difficult, but I am still confident that European leaders know the consequences of [behaving otherwise]. So at this moment I am a little bit more optimistic that, while the eurozone will have a recession, they will muddle through.
The US economy will not be immune if Europes crisis worsens, Rhee adds. Such a scenario of eurozone contagion hitting the US financial sector and real economy would be a global shock, as in 2008. Our [baseline] scenario is that the US will grow by 2% and the eurozone will contract by 0.5%. But that does not exclude the possibility that bad things will happen.
Indeed, bad things are already happening in Europe and beyond, as former Goldman Sachs (Asia) managing director and vice-chairman Kenneth Courtis notes: Europe is in recession; Japan is wobbling; the US is doing better, after four years of aggressive fiscal and monetary chemotherapy, but the debt cancer at the core of the US banking, household, and public sectors is simply in a phase of remission and this is the same for much of Europe and for Japan.
Against this background, 80% of growth in the world this year will come from emerging markets. Of that, half will come directly from China and half of the remainder will be China-related, with Asia in particular participating in the renewed cycle of Chinese growth that is now on the cards, notes Courtis, who is also a founding partner of Themes Investment Management and Themes Investment Partners.
The emerging world remains the sole beacon of growth globally, says former ADB vice-president and executive director William Thomson. By contrast, the developed world is, at best, halfway through a lost decade as it faces huge challenges over indebtedness and ageing, inflexible societies, says Thomson, chairman of Private Capital, Hong Kong and director of Finavestment, London.
Hopes for the global economy remain pinned on China, still a relative bright spot for many observers. The ADB forecasts 8.5% growth for China, compared to the IMFs prediction of 8.2%. We believe that China has the fiscal space to offset some slowdown of export demand from European countries, says Rhee.
China has large policy space to have a growth rate of 8% or more. This is the first year of the political transition in China, and they wont want to make the economy cool down too rapidly, he says.
Courtis too is upbeat on China, arguing that it is bottoming right now, and that the uplift will gain moment as we move through the last months of the year and into 2012.
He says that consumption as a share of GDP is rising as is industrial production and business confidence. Inflation is down, residential real estate prices have moderated, and the infrastructure build-out, which seemed to be getting ahead of itself, has been guided back to a moderate pace of expansion, he says.
But others, including Peking University professor Michael Pettis, point out that Chinas economic model is itself in need of a complete overhaul as demand for the nations exports fades. But boosting domestic demand to make up for the shortfall will itself require momentous changes to an economic system a fact that will put a damper on growth over the medium term.
Views on India are far more dispiriting. Says Courtis: India faces giant economic and political issues, including a vast current account deficit, which is increasingly financed by hot money, an equally troubling fiscal deficit, continuing high consumer price and wholesale price inflation, a sliding competitive position, and a vast infrastructure shortfall.
Imagine what a powerful engine for development and growth the country would be if it could address these long-term issues. But with a political system increasingly paralyzed, it is unlikely to do so anytime soon. We will continue to see India continue to under-perform its potential.
Rhee points out that India has already cooled down from high inflation last year. He acknowledges that the economy faces a budget and current account deficits as their reforms are going quite slowly. But he says that growth is nevertheless likely to be similar to last years, at 7%.
Economists take an even more sombre view of Japans prospects. Partly owing to the technical rebound and partly to the fiscal stimulus, the ADB expects Japans economy to expand by 1.9% this year.
The real challenge will be in 2013 because their stimulus plan aimed at offsetting the impact from the earthquake will end this year, and they have not announced any other plan as yet, says Rhee. The consumption tax may be raised next year a good thing for long-term sustainability of the fiscal situation and for the health of Japans economy but in the short run it may slow down growth.
Courtis is blunter: Japan, he says, would be the global marathon champion, if there was a trophy for sustained, long-term decline.
Deflation, debt, demographics and debilitating public leadership are a constant drag on the countrys economy, with no substantive reversal in sight.
To the contrary, the down slope of decline seems if anything to be steepening, with an acceleration in the deindustrialization of Japan, and the vast new issues of energy and management which last years earthquake and tsunami exposed.
At best, I expect Japan to bobble, like an old and withered cork, on a sea of trouble.
Views are no more upbeat on Asias most open economies, including Singapore, Hong Kong and South Korea. While south-east Asia overall is set to grow at 5.2% in 2012, helped by strong recovery in Thailand and continuing strength in Indonesia, Singapores GDP growth will fall to just 2.8% , the ADB says.
Hong Kong will be the other weak man of Asia this year, with its projected growth slumping to 3% because of its strong exposure (like Singapore) to external trade, especially with the US and Europe. South Korea too will grow only at a modest 3.5%.
Meanwhile, the threat posed by oil prices is common across Asia and beyond. Although geopolitical risks in the Middle East have moderated in recent weeks, Rhee expects oil prices will remain high but we dont expect the price to go up much further.
Still, a high oil price will slow down growth in many Asian economies, though inflation generally wont be that high. The ADB expects inflation to moderate from 5.9% last year to 4.6% in 2012.