Troubled by Higher Inflation and Rising Unemployment
Developed Asia Pacific economies witnessed mixed economic fortunes during the fourth quarter of 2012. While the group’s largest economy, Japan, suffered from stubborn deflation and slumping trade due to a bitter territorial dispute with China, Singapore and Hong Kong managed to fare better.
Both the key financial centers of Asia managed to catch up with their laggard performances of the first part of the year in the second half primarily due to a strengthening recovery in China. Wealthy Chinese consumers have started flying again to Honk Kong to shop for jewels and watches while keeping Singapore’s ports and factories humming.
On the other hand, resource-rich, commodity-driven Australia showed signs of slowing as other key components of the economy ran out of steam. Notably, consumer spending in Australia in recent months has come under considerable pressure despite strong hiring and investment by Australia’s mining sector. The mining sector boom, which played a part in making the Australian dollar expensive, proved detrimental to other industries in the country.
Australia’s consumer confidence slumped as key industries such as autos and tourism struggled to compete abroad due to the appreciating Aussie dollar. Australia’s neighbor New Zealand also posted gloomy economic news, with unemployment woes haunting the Kiwis as worried employers remained hesitant to hire full-time workers.
JAPAN: YET ANOTHER PAINFUL QUARTER
The floor beneath Japan’s economy slipped yet again during the third quarter of 2012. As consumers pared back, exporters slumped and corporate profits collapsed, Asia’s second largest economy capped another painful quarter with its GDP contracting 3.5 percent through the three months ended September 2012. Japan’s economy has been facing problems on multiple fronts for over a year: a stark slowdown for major trading partners like Europe, a trade-busting territorial fight with China, persistent deflation at home, and declining profits for previously world-beating electronics and auto companies knocked off Japan’s economy. Most of these negative factors have overweighed the positive effects of reconstruction spending and stimulus that Japan instituted during early 2011 in the aftermath of a devastating tsunami.
After inflicting two quarters of recession on the island nation in the period between April and September, these factors are estimated to have imposed a recession on Japan during the final three months of 2012 as well. A survey of economists by Bloomberg predicted a median forecast of 0.5 percent contraction for Japan’s economy for the three months ended December 2012.
Predictably, Japanese citizens showed their frustration over their country’s economy by voting out the ruling Democratic Party of Japan in the December 2012 elections. Japanese voters instead brought back to power the Liberal Democratic Party (LDP) that had ruled Japan for most of the past six decades. Japan’s new Prime Minister, Shinzo Abe, from the LDP wasted no time in pursuing his economic agenda for Japan. The Japanese newspapers, Yomiuri and Kyodo News, reported that Mr. Abe was readying a 12 trillion yen fiscal measure ($136 billion) to shore up Japan’s struggling economy. Mr. Abe has also urged Japan’s central bank, the Bank of Japan, to aim for an inflation target of 2 percent from the current 1 percent to arrest deflation and stimulate growth.
As if domestic growth challenges were not enough, Mr. Abe faces an uphill task in mending a frayed relationship with neighboring China, which is having an outsized effect on Japan’s exports. Japan’s territorial dispute with China over the Senkaku islands has led to a boycott of Japanese products in China. As a result, the Japanese exports of cars, hi-tech machinery, electronic parts, and even services like air travel to China have collapsed. Japan’s exports to China fell 1.7 percent during November, the sixth consecutive monthly fall, adding to the pain of already-beleaguered Japanese corporations, which are reeling under the effects of slowing sales in Europe and intensifying competition elsewhere.
AUSTRALIA: CONSUMER SPENDING SLOWS AMIDST INTEREST RATE CUTS
Australia’s economy, one of the few star performers among developed nations for the most part of the past two years, lost a bit of momentum during the third quarter 2012. Australia’s economy has largely outperformed those of developed economies primarily due to a mining boom fueled by China and India’s thirst for resources such as iron ore and coal. However, the mining boom had an inimical effect on many other industries. First of all, the mining boom had played a part in boosting the country’s currency the Australian dollar, widely called the Aussie.
As the Aussie appreciated, many other Australian industries such as wine-making, travel and tourism, and autos struggled to sell their wares and services to foreigners. In fact, many of the auto makers in Australia are cutting production and are paring back their workforce. For instance, Ford Motor’s Australian division announced that it will offer 440 severance payouts and Toyota said that it will cut nearly 350 jobs in its main plant in Australia. Consequently, despite resilient hiring trends in the mining industry, the investment and job growth outside of Australia’s mining industry has largely failed to gain traction.
The slowdown in consumer spending has already contributed to milder GDP growth. During the third quarter of 2012 ended September, consumer spending grew at its weakest pace in nearly ten quarters. Furthermore, Australia’s government is tightening its purse strings to rein in spending and achieve a balanced budget. Consequently, despite an unemployment rate that fell to 5.2 percent during October, consumers have been skeptical. For instance, Australian consumer confidence tracked by Westpac Banking Corp and the Melbourne Institute slumped 4.1 percent in December. Many households fear that weak labor market conditions could hurt job sentiments in the months ahead. Their fears gain legitimacy from the fact even the mining industry is moving cautiously with its massive new investment projects. A case in point: BHP the world’s largest miner, delayed a $33 billion expansion project at the Olympic Dam, which holds reserves rich in copper, uranium and gold.
Australia’s central bank, however, is loosening fast the country’s monetary policy to support growth. The central bank, which had cut interest rates by a significant 175 basis points in six installments over the past six quarters, is still worried about Australian industries. Glenn Stevens, the governor of the Reserve Bank of Australia, hinted that the handover of economic demand from the mining sector to other varied sources may not be “seamless.”
HONG KONG: GAIN AFTER PAIN
Hong Kong’s economy lost momentum to such an extent in 2012 that Hong Kong’s government said it would be happy to achieve GDP growth of just 1.2 percent for 2012. That is a far cry from the 7.1 percent and 5.0 percent GDP growth achieved during 2010 and 2011, respectively.
A slew of factors ranging from a slowdown in China during the first half of 2012, lower consumer spending, falling exports, and slumping retail and luxury goods sales posed significant hurdles for Hong Kong’s economy.
During the beginning months of 2012, mainland China instituted a strict monetary policy at home to curb inflation. As money supply and credit became scarce, capital that often found its way from China to Hong Kong also dried up. Wealthy Chinese, who typically buy apartments, jewels, and luxury watches among other expensive goods in Hong Kong, had become increasingly stingy. This in turn put pressure on the tourism and retail industries. Meanwhile, the troubles for Hong Kong’s European trading partners also led to lukewarm growth in overseas sales during the first half of the year.
However, prospects for Hong Kong improved significantly during the second half of 2012. As China loosened its monetary policy and global demand picked up, albeit slowly, Hong Kong witnessed a surge in its stock market and a rebound in its retail and consumption segments as well. Hong Kong’s benchmark stock index, the Hang Seng, returned 23 percent in calendar year 2012. As of early January, the stock market touched a 19-month high. Even Chinese consumers who were reluctant to spend or travel during the earlier months were more forthcoming towards the end of 2012, helping retail sales rise 9.5 percent for the year. This trend is largely expected to continue into 2013 as well, with private economists surveyed by Bloomberg predicting a 15 percent to 16 percent jump in retail sales in 2013.
Honk Kong’s government, however, faced persistent pressure on the price front. Despite a slowdown in GDP growth for 2012, the city expects 2012 full-year inflation to rise 3.9 percent, up from its earlier forecast of 3.7 percent primarily due to a steep rise in food costs and rentals.
NEW ZEALAND: UNEMPLOYMENT HITS A 13-YEAR HIGH
New Zealand’s economy witnessed a challenge from listless labor market conditions during the third quarter of 2012. For the three months ended September, New Zealand’s unemployment figure inched up almost 50 basis points to touch 7.3 percent, a level not seen in the past 13 years. Weak labor market conditions in Auckland, one of New Zealand’s key employment zones, played a significant part in pulling the rug out from under employment figures. Although the labor participation rates were unchanged at 68.4 percent, the actual number of people employed slipped 0.4 percent to 2.22 million.
Difficult economic conditions amidst a strengthening currency and weak domestic demand had largely weighed on New Zealand’s economy. With economic conditions remaining weak, employers across the country have preferred to hire temporary labor rather than full-time workers. In fact, the number of full-time workers fell nearly 0.8 percent to 1.7 million even as total part-time workers jumped nearly 1.4 percent to 519,000. Almost all services industries such as those in the scientific, technical and administrative areas along with the construction and manufacturing sectors, shed jobs. Meanwhile, the strength of the New Zealand dollar has proved a challenge for the country’s farmers who export dairy products and commodities to fast-growing markets like China and India. The 6.5 percent jump in the value of the New Zealand dollar against the U.S. dollar has made the country’s products expensive to consumers across Asia. Further falling exports and rising imports have added to New Zealand’s trade deficit. The country’s trade deficit for 2012 ballooned to a three-year high figure.
Nonetheless, although the fourth quarter official economic data is not yet available, private data showed that New Zealanders were on more solid footing than they were during the third quarter of 2012. Residential construction and house prices picked up pace and consumer spending got a boost during the fourth quarter. House prices in Auckland rose 7.7 percent in 2012 over 2011, a large residential housing broker in Auckland reported. A significant part of the gain had come during the final quarter of the year, during which time consumer confidence rose in 7 of New Zealand’s 11 administrative regions and credit card spending surged.
SINGAPORE: SCARCE LABOR THREATENS INFLATION
Singapore’s economy proved resilient and expanded by 1.8 percent during the fourth quarter of 2012 even as economists surveyed by Bloomberg predicted a median growth of just 1.6 percent. Singapore, which reports its full year data far ahead of other Asian countries, also said that its full year GDP growth for 2012 was clocked at 1.2 percent. Although Singapore’s fourth quarter growth was better than expected, 2012 full-year GDP growth was a fraction of what the country achieved in 2011.
Although Singapore’s construction and service industries, which grew 5.9 percent and 1.5 percent respectively, offset a broader weakness in manufacturing arising from lukewarm exports during the fourth quarter of 2012, key structural factors are posing a significant challenge for Singapore’s long-term growth.
For one, the labor market in Singapore is pretty tight. The island nation for long has depended on immigrant labor – mostly from other developing regions of Asia – for economic growth. However, Singapore in the recent past has restricted the number of foreign workers seeking to work in the country amidst growing opposition to immigration and increased congestion in the city state. That has in turn put a premium on labor. With jobless rates already touching a low of 1.9 percent, inflation has been persistently trending upwards. Consumer price inflation, driven by oil and food costs along with rentals, has increased at a monthly pace of 4 percent for more than two years.
With inflation arising from labor costs threatening to go up, Singapore is witnessing slowing growth. Even the country’s Prime Minister, Lee Hsien Loong, commented that the island has to prepare for a “new phase” of its economy, predicted to grow at a slower pace of 1 percent to 3 percent. Many corporations that favor Singapore’s low taxes and regulations have already complained about restrictions on foreign labor. Mr. Loong himself acknowledged that scarce labor was behind Singapore’s slowing rate of expansion in 2011.
Amidst such constraints, Singapore projected that inflation will range between of 3.5 percent and 4.5 percent in 2013, compared to 4.5 percent in 2012. Economists surveyed by Bloomberg opined that the Monetary Authority of Singapore, which controls inflation on the island by adjusting the value of the Singapore dollar against major currencies, will likely let the currency appreciate more in the face of higher inflation and better-than-anticipated fourth quarter growth.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
© Thomas White International
