Easy Monetary Policies Engineer a Rebound
Many developed economies in the Asia Pacific region rebounded during the second quarter of 2013 to post a healthy set of growth and inflation numbers. Turning on the monetary spigots during the past one year provided a major fillip to many developed Asian economies. Countries that fumbled in the wake of natural disasters in the recent past, showed marked improvement. Even those countries that were said to be suffering from structural deficiencies, too, responded well to the monetary medicine administered by their various central banks.
The monetary easing varied in magnitude across economies. While in Japan, unconventional bond buying measures helped weaken the domestic currency and spruce-up consumer sentiment, low interest rates in New Zealand stimulated business confidence. Exports from some of the key developed Asian economies strengthened handsomely during the quarter. The exception, however, was Australia, where exports of resource-based commodities like iron ore and coal did not fare well in comparison to the spectacular rise of exports of dairy and meat products from New Zealand.
Two of the regions’ trade-based economies Hong Kong and Singapore also posted growth. However, unlike elsewhere in developed Asia Pacific, inflation continued to cast its shadow over their economies during the quarter. Both Hong Kong and Singapore tightened mortgage rules to prevent a speculative bubble arising from inexpensive foreign capital.
Japan: ‘Abenomics’ at Work
Six months into Japanese Prime Minister, Shinzo Abe’s ‘Abenomics’, an economic policy that has combined fiscal and monetary stimulus along with reforms aimed at investment and labor markets, Japan is showing spasms of life. As both the country’s central bank and the government flushed hundreds of billions of dollars into the system, various corners of the Japanese economy like consumer spending, mortgage lending, and exports began looking up.
For the first time in a year, lending by Japanese banks rose in May. As Mr. Abe and his handpicked central bankers went through great pains to stoke mild inflation in Japan, consumers finally opened their purses to spend. Increased consumer spending in fact contributed to better-than-expected growth for Japan during the first quarter. Even Japanese corporations took advantage of easy money, ramping up borrowing for overseas mergers and acquisitions transactions.
On the exporting side too, Japan thrived. After registering current account deficits for much of 2011 and 2012, Japanese exporters managed to find their mojo, bringing the current account to a surplus during the first half of the year. All this was made possible as the yen remained weak against major currencies, an effect engineered by the country’s loose monetary policy.
However, before Mr. Abe and Japan’s central bankers could pat themselves on the back for giving the economy a fighting chance, warning signs began flickering all over. While the yen had remained weak for most part of the first half of 2013, exporters were alarmed briefly by the yen strengthening against the U.S. dollar in the second quarter. And while the cheap yen had largely helped the competitiveness of Japanese exporters, it has added to rising import bills, threatening the current account’s ability to remain in a surplus. Additionally, the high cost of energy is souring the mood in Japan’s service sector, which according to a survey by the government dipped in May.
Consequently, both private sector and public sector economists, while optimistic about growth in the country for 2013, opined that the pace of growth for the year will moderate.
Australia: a 21-Year Old Record at Risk
The Australian economy has not experienced a recession in nearly 21 years. While that might be an impressive record, an increase in the probability of a recession in the country has caused hand-wringing lately. Private economists from investment banks have opined that there is a one in a five chance that Australia might slip into recession in the year ahead.
That is painful for an economy that managed to escape even the global financial crisis of 2008 relatively unscathed. Timely stimulus, strong demand for commodities like iron and coal from emerging economies, and investment in new mining capacity kept Australia afloat in 2008 even as much of the developed world sank under tons of debt.
But over the past five years the Australian economy has undergone significant changes. While the mining boom created robust investment and numerous jobs, mostly in Western Australia, the accompanying strength of the country’s currency resulted in a ‘Dutch disease’, killing industries such as autos, wine-making, tourism and even services in many other parts of Australia. States such as Victoria, which thrive on manufacturing, have worn a somber look over the past few years.
But now, even the mining industry, the key driver of the Australian economy in recent times, is also losing momentum, partly due to lukewarm demand for iron and coal from emerging economies.
That has posed a severe challenge for the country’s central bank, the Reserve Bank of Australia. A severe strain in the non-mining industry prompted the central bank to go on an interest rate cutting cycle starting in 2011 and ending with a record low rate of 2.75 percent in early 2013. To gauge the severity of the slowdown, economists point to the fact that even the global financial crisis did not warrant such low levels of interest rates in the country. Further, Australian central bankers were also reportedly worried about the time it was taking for lower interest rates to seep into the economy and provide a stimulus.
Nonetheless, positive news is slowly emerging out of Australia since the second quarter of 2013. The Aussie dollar, whose strength against the U.S. dollar harrowed numerous manufacturing and services industries, has weakened. Thanks to a relatively prudent management of the nation’s finances, Australia still holds onto its AAA credit rating. In a sign of improvement, even manufacturing states such as Victoria reported a declining unemployment rate in recent months. Housing market and new loan initiations, which reached a new low earlier this year, reversed and posted gains during the second quarter of 2013. Despite these strengths, Australia’s central bank forecast moderate growth accompanied by rising unemployment on the back of slowing mining projects.
Hong Kong: Strong Employment and Consumerism Offset Weak Exports
Hong Kong’s economy expanded 2.8 percent during the first quarter of 2013 over the year-ago period. However, quarter-over-quarter growth was clocked at a lukewarm 0.2 percent, raising concerns about a slowdown in one of Asia’s prominent financial centers.
Quarter-over-quarter growth inched up at a snail’s pace mainly because international trade, the mainstay of Hong Kong’s economy, is still facing headwinds. Not only are Hong Kong’s exports to Europe and the U.S. under pressure, but also a slowdown in neighboring China has posed a challenge to Hong Kong.
Still, Hong Kong’s domestic economy has showed substantial resilience. The strength of the consumer market buoyed by tourism has helped Hong Kong post nearly a double-digit jump in retails sales growth. While the sales of expensive alcohol and tobacco products came under strain after a Chinese diktat to its bureaucrats about conspicuous consumption, the sale of jewelry items fueled retailers during the quarter.
But despite these positives, Hong Kong’s monetary authority is worried about the growth trajectory for the rest of 2013. Harsh measures introduced over the past two years to curb property prices are expected to take a toll on the construction industry. Hong Kong had earlier tightened rules for the mortgage industry, fearing a bubble as real estate prices doubled since 2009. Further, higher-than expected inflation and rising household and consumer debt in Hong Kong is also fueling doubts about the consumer’s ability to shoulder Hong Kong’s economy for the rest of the year.
However, taking heart from a low level of unemployment of 3.8 percent, Hong Kong reaffirmed its growth projections for 2013 between 1.5 percent and 3.5 percent.
New Zealand: Demand for Dairy and farm Products Prime the Economy
New Zealand’s economy is showing surprising strength. For years, the economies and currencies of New Zealand and Australia roughly moved in tandem, given their dependence on commodities. These days, however, the neighbors are parting ways, at least partially. While Australia’s economy has come under strain, New Zealand’s economy is emerging out of the destruction caused by a deadly earthquake more than two years ago. The reason for these parting ways can be explained by the nature of the resources the two countries export.
While Australia exports resources such as iron ore and coal, New Zealand mainly exports farm and dairy products. With a slowdown in investment-driven emerging markets like China, demand for Australia’s wares has also come under strain. Nonetheless, the demand for meat and milk products from New Zealand has risen thanks to robust consumerism in emerging markets like China.
Consequently, since mid-2011, New Zealand posted nine consecutive quarters of growth. While a severe drought this year hampered the supply of farm and dairy products, a decline in supply in fact provided a fillip to New Zealand’s export prices. Furthermore, New Zealand’s interest rate still remains at 2.5 percent, a drastic reduction that was instituted to help businesses in the wake of the 2011 earthquake. With inflation under control, the low-level of interest rates has helped buoy the economy.
On a sour note, however, the strength of New Zealand’s currency is progressively hampering the country’s exporting prowess. While the central bank attempted to intervene in the currency markets to weaken the New Zealand dollar, the currency has continued to remain strong. Observers have opined that the central bank’s attempts to weaken the currency have been tepid and have called for more action. The Kiwis are now attempting to bring back growth by additional structural reforms. New Zealand has announced its intention to sell some of its state-owned utilities and has also proposed a trade agreement with countries like Taiwan to help domestic manufacturers.
Singapore: Labor Shortage Threatens to Push Inflation Up
While major developed Asian economies like Australia and Japan are loosening monetary policy, Singapore is showing a preference for tightening.
The trade dependent city state has thus far managed to keep its economy growing thanks to rising exports and robust financial services. Consequently, Singapore’s first quarter growth exceeded expectations. What’s more, the country’s growth, supported by broad-based contribution from manufacturing, construction and other key services, was accompanied by low level of inflation. Significantly lower inflation in turn relieved the pressure on the country to tighten monetary policy.
Moreover, unemployment in Singapore has consistently been driven down below the long-term average primarily due to a shortage of new workers. Singapore has significantly tightened its rules for immigration on the back of popular discontent among the country’s citizens. This has slowed the arrival of new workers to Singapore from other emerging Asian economies. As a result, Singapore’s monetary authority has warned that inflation in the coming decade will be at least 100 basis points more than the previous one. Singapore also indicated that the year ahead will witness a sharp rise in wage-related costs.
For the rest of 2013, Singapore tempered the expectations for growth in the wake of a slowdown not only in its traditional developed markets such as Europe and North America but also in emerging Asian economies such as China and India. Singapore’s Trade Ministry reiterated its forecast for GDP growth at 1 percent to 3 percent for 2013.
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.
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