Threats to Growth Keep Monetary Policy Loose
After facing subdued economic conditions for the most part of 2012, developed Asia Pacific economies started 2013 on a cautious note. While most countries opined that downside risk to GDP growth declined substantially, challenges to growth arose from a recessionary scenario in key developed economies, especially from the European Union.
Some of Asia’s key commodity-driven countries like Australia and New Zealand were helped by China’s demand for industrial, energy, and agricultural commodities. Australia, one of the world’s largest exporters of iron and coal, benefited from an investment boom. However, a slowdown in China’s consumer markets meant milder growth for New Zealand’s agricultural commodity exports.
Trade-dependent Singapore and Hong Kong, however, faced an inflationary scenario arising from structural factors like rising labor costs. Primarily due to threats of a trade volume decline from the European Union, both economies issued a word of caution about their economic prospects for 2013.
Meanwhile, Japan proved to be an unlikely star during the first quarter of 2013. The country’s economy brimmed with confidence during the first quarter of 2013 as Japan’s new political leadership embarked on a massive monetary easing policy to end the country’s deflationary economic conditions. As a result, despite numerous economic troubles such as high government debt and demographics, both business and consumer confidence scaled new heights in Japan. With the exception of Singapore, developed Asia Pacific economies remained loose on monetary policy and kept interest rates low in the face of subpar economic performance.
JAPAN: MONETARY FLOODGATES OPEN UP
Although Japan ended the final quarter of 2012 on a recessionary note, the country began an upbeat 2013 largely due to a sea change in the monetary and political establishment. Soon after the Liberal Democratic Party (LDP) of Japan, which had ruled the country for the most part of the past 50 years, returned to power in late 2012, things have been looking up in Japan.
Japan’s newly-elected Prime Minister and LDP leader, Shinzo Abe, embarked on a massive monetary easing policy with the goal of breaking the country’s deep-rooted deflationary conditions. The advent of Mr. Abe’s ‘reflationary’ economic policies, aimed at stoking inflation and subsequently growth, sent world equity markets on an upward trend.
The Nikkei 225, Japan’s bellwether stock market index, touched a 5-year-high in early April as the Bank of Japan’s newly-appointed governor, Haruhiko Kuroda, announced that he would flood Japan’s economy with cash to stimulate liquidity and growth. The new governor, taking a cue from the country’s prime minister, said that the central bank would buy assets worth 7.5 trillion yen ($78.6 billion) every month to double the monetary base in two years.
The rush of yen emerging out of the central bank also weakened the Japanese currency to a five-year low of nearly ¥95 against the U.S. dollar. A weak yen helps the competitiveness of a number of Japanese electronics and auto firms by making their goods cheaper to foreign customers. Japan’s loose monetary policy and weakening yen also lifted the spirits of Japanese consumers and businesses as confidence among them rose to the highest levels since 2006.
Still, Japan’s largest quantitative easing since 2001 is yet to result in any real gains. As of 2012, Japan’s debt-to-GDP ratio stood at 240 percent, the highest among any country in the world. While Mr. Abe took substantial actions to curb deflation, he is still faced with a number of structural economic challenges arising from an aging population, rising social sector spending and health costs, and a dwindling number of workers.
Nonetheless, Japan’s aims to boost consumption among its population by breaking the deflationary grip through monetary easing is expected to boost real growth rate by 2.5 percent for 2013.
AUSTRALIA: SLOWING MINING AND SUBDUED MANUFACTURING RAISE CONCERNS
Powered by robust investments in the mining sector and strong exports of commodities, Australia’s resource-rich economy ended 2012 with the fastest growth rate since 2007. The land down under, in fact, has had an enviable record among any other developed country, as 2012 marked the 21st consecutive year of growth. Uninterrupted growth also helped the large island keep its unemployment rate consistently below 6 percent for most of 2012, helping sustain consumer spending.
Nonetheless, Australia is worried about the weaker parts of the economy, especially manufacturing. As Australia’s interest rates have remained quite high relative to other developed economies worldwide, capital from across the globe has flooded Australian shores. This along with strong economic prospects in Australia has resulted in the persistent strengthening of the Australian dollar against the U.S. dollar, much to the detriment of the country’s wine-making and auto-manufacturing industries. Consequently, while overall unemployment has been low in Australia, the manufacturing and tourism industries have continued to shed jobs primarily due to competitive issues arising from the currency.
As a result, Australia’s lopsided economy – a strong investment and export sector co-existing with weakening consumption – has prompted the country’s central bankers to keep monetary policy expansive. With construction activity falling, investment in machinery and equipment declining, and expenditures in mining sector peaking, many traders surveyed by Bloomberg expected Australia to cut interest rates further in 2013.
Australia, which boasted a GDP trend-growth rate four times as that of its OECD peers, is forecast to grow at 2.5 percent for 2013, according to the Reserve Bank of Australia.
HONG KONG: ASIA’S REVIVAL AND RISING GOVERNMENT SPENDING HELP ECONOMY
Hong Kong bounced back during the final months of 2012 and registered robust growth during the December quarter – making it the fastest growing quarter in a year. Hong Kong’s economy, which is tethered to that of its giant neighbor China, performed strongly on the back of a revival in exports to Asian economies and strong consumer spending. The robust performance of the final quarter of 2012 also continued into 2013 as the financial center posted a vigorous increase in retail sales and recorded a vibrant growth in tourist arrivals.
While the broad labor market and employment situation remained stable, Hong Kong experienced a strong spike in inflation rates in recent months. Inflation trended over the five month average of 3.5 percent in January, but unexpectedly spiked to over 4.4 percent in March. Housing and rental costs, which remain a contentious issue for a large majority of Hong Kong’s residents, is also proving to be a challenging issue for the region’s administrators.
Hong Kong’s administrators are trying to pacify the country’s residents by doling out higher infrastructure and social spending. Flush with surplus cash, Hong Kong’s financial ministry, responsible for overseeing the country’s budget, announced that the government will increase social welfare spending by over 31 percent to $7.2 billion for the year 2013. These measures alone are forecast to contribute over 1.4 percent of Hong Kong’s GDP, which according to IMF’s estimates will grow by 3.5 percent in 2013.
NEW ZEALAND: EXPORTS TO CHINA EMERGES AS A KEY ECONOMIC ENGINE
New Zealand’s Prime Minister, John Key, made an important state visit to China during the first week of April 2013 in an attempt to deepen business ties with the rising Asian giant. These days, China has grown so important to New Zealand businesses that the Kiwis expect more business from the Middle Kingdom than from their traditional trading partner Australia. Data from New Zealand confirms the obvious: China is the largest buyer of New Zealand’s dairy products such as milk powder and forestry products such as logs. China also consumes large volumes of wool manufactured by New Zealand. In the beginning of 2013, trade and export data showed that China overtook Australia as New Zealand’s largest trading partner for the first time in over 25 years.
Now that New Zealand’s economy is more and more tied to that of China, New Zealand also increasingly shares China’s economic troubles. For the most part of 2012, China’s growth slowed from its previous highs. As China sneezed, New Zealand’s growth slowed to a mere 0.2 percent during the second and third quarter of 2012. However, China started 2013 on a promising note. It posted the fastest quarterly growth for the December quarter in nearly two years. This in turn has cheered New Zealand businesses. In addition to exporting, New Zealand is also tailoring its hospitality industry to boost tourism revenues from Chinese tourists.
Nonetheless, New Zealand’s agricultural and dairy output, which makes up a fourth of all the country’s output, saw grim prospects as the most widespread drought in nearly 30 years befell New Zealand’s agricultural economy in early 2013. Although New Zealand’s central bank held its interest rates at its lowest levels, the country expects the drought to curb the momentum of economic expansion. Consequently, the Bank of New Zealand trimmed its economic growth forecast to 1.1 percent for the first half of 2013 from its earlier prediction of 1.3 percent.
SINGAPORE: RISING LABOR SHORTAGES STOKE INFLATION
Singapore’s export-dependent economy is in a quandary over its immigrant labor issue. The city-state, which is heavily dependent on migrant foreign labor to man the economy, is facing tough opposition from its residents to increase the number of migrant workers from poorer regions of Asia like China and India. When the Singapore government issued a white paper on immigrants in early 2013, thousands of native Singaporeans marched in the state capital opposing the government’s plan to increase immigrants.
Many of Singapore’s industries such as construction, hospitality and even manufacturing employ a large number of foreign workers. In the time between 2004 and 2012 more than 1.1 million workers from across Asia landed in Singapore to find employment.
While Singapore’s economy accelerated during this time, the rise in migrants led to overcrowded public transportation, skyrocketing house prices, and rising costs, creating a backlash among the natives. Bowing to pressure on the ground, the Singapore government has largely tightened immigration. However, that has led to a steep rise in structural inputs like unit labor costs. Unit labor costs, which rose nearly 6.1 percent during the second half of 2012, in turn have stoked inflation in Singapore. Inflation averaged nearly 4.6 percent for 2012, making Singapore one of the most expensive cities in the world to live. Furthermore, rising prices also started weighing in on aggregate demand, putting pressure on the country’s output. Consequently, Singapore ended 2012 with a growth rate of 1.3 percent, the slowest pace of growth since 2009.
While labor costs continued to trouble Singapore’s economy, Singapore’s external trade environment showed a marked improvement on the back of a recovery in Asia and the U.S. The country’s Trade Ministry anticipates growth of 1 percent to 3 percent, and the central bank expects inflation to average 4.6 percent.While labor costs continued to trouble Singapore’s economy, Singapore’s external trade environment showed a marked improvement on the back of a recovery in Asia and the U.S. The country’s Trade Ministry anticipates growth of 1 percent to 3 percent, and the central bank expects inflation to average 4.6 percent.
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
