Cheaper Oil Seen to Help Japan, Australia Hit by Slump in Commodities
Japan, the biggest of the developed economies in the region, stands to benefit from cheaper oil as it should boost domestic demand and help some of the country’s key industries reduce costs. Still, the bigger advantage for the country seems to be the re-election of Prime Minister Abe, which has ensured continuity of the fiscal and monetary policies pursued by the government for the last two years. The launching of a fresh stimulus package and the postponement of a tax hike due in 2015 also bode well for the economy. Australia’s central bank has been supportive of the economy by maintaining a low interest rate as the continuing fall in the price of iron ore has taken a toll on the country’s economic growth.
Meanwhile, New Zealand’s economy appeared to be in the recovery mode as third-quarter growth increased 1 percent compared to the previous quarter, though the 50 percent plunge in dairy prices since February 2014 has led to reduced revenues for the prominent dairy exporter. The city-state of Singapore has eased its monetary policy by keeping its dollar low against other currencies to tackle deflation with the fall in consumer prices. Despite street protests by pro-democracy activists, the pick-up in domestic consumption and a relatively smaller drop in spending by tourists helped Hong Kong’s economy post a growth rate of 2.7 percent in the third quarter.
At a Glance
Japan: Prime Minister Shinzo Abe’s re-election in December 2014 is a big positive for the economy, reassuring investors with the re-elected government’s renewed commitment to reforms. Consumption should improve in 2015 as the government has postponed a proposed hike in taxes, while cheaper energy prices should give a fillip to domestic demand.
Australia: The commodity-dependent economy has been facing economic headwinds since the price of its key exports started plummeting. The central bank of Australia decided to keep interest rates low at 2.5 percent in December, acknowledging slowing economic growth.
Hong Kong: Despite the ‘Occupy’ protests, the economy posted a growth rate of 2.7 percent in the third quarter, which exceeded expectations of a 1.8 percent growth. The pick-up in domestic consumption and a relatively smaller drop in spending by tourists were the main drivers of growth during the quarter.
New Zealand: The economy received a shot in the arm as third-quarter growth increased 1 percent compared to the previous quarter, according to a Bloomberg news report. GDP growth was clocked above forecasts, thanks to increased output from farming and mining activities.
Singapore: With the fall in consumer prices, the government recently decided to ease its monetary policy by keeping its dollar low against other currencies. According to officials, manufacturing dropped 1.9 percent in December from the year-ago period, with output of electronic goods decreasing by 2.4 percent, and production of petrochemicals sliding 3.5 percent.
JAPAN: “ABENOMICS” GETS A VOTE OF CONFIDENCE
Though expected, Prime Minister Shinzo Abe’s re-election in December 2014 was a big positive for the Japanese economy, which had experienced a marked slowdown during the second and third quarters of last year. Investors were also reassured by the re-elected government’s renewed commitment to reforms. The Abe administration began its second stint by announcing a stimulus package worth about $29 billion to spur growth in some of the country’s depressed regions and help households with subsidies and other handouts.
Specifically, the program will also include providing shopping vouchers to low-income citizens and subsidizing heating oil. Part of the spending will also be earmarked for infrastructure-building. The government estimates that the latest package alone would boost the country’s GDP by 0.7 percent in the financial year beginning April 2015.
It is widely perceived that the contraction in economic growth last year was mostly due to the slowing consumption after taxes were increased in April 2014. However, consumption should improve in 2015 as the government has postponed a proposed hike in taxes. Moreover, cheaper energy prices should give a fillip to domestic demand in Japan, a net oil importer, while exporters should benefit from a lower yen. Besides the stimulus package, the government has agreed to bring down corporate taxes in its effort to raise wages, and spur consumer demand. The proposal is to bring the tax down to 32.11 percent in the fiscal year beginning April 2015 from the current level of 34.62 percent.
Still, inflation remains a concern, dropping to a 14-month low in November due mostly to the plunge in the price of oil. Battling deflation is one of the proposed aims of “Abenomics.”
AUSTRALIA: CONCERN OVER THE CONTINUING FALL IN IRON ORE PRICES
Australia’s commodity-dependent economy has been facing economic headwinds since the price of its key exports started plummeting. Predictably, the country’s budget deficit is expected to widen to about $33.2 billion during the first half of the year ending June 2015, a Reuters news report said. According to a forecast from the government, the economy is expected to grow 2.5 percent in 2014-15 and 3.5 percent in the subsequent years. To put things in perspective, the price of iron ore, the country’s biggest export, has plunged from A$92 a ton in May 2014 to A$60 a ton currently. Despite concerns, the government has not proposed spending cuts or new taxes.
Meanwhile, the central bank of Australia decided to keep interest rates low at 2.5 percent in December, acknowledging slowing economic growth. Australia’s economic growth disappointed in the third quarter of 2014, clocking a rate of 2.7 percent on an annual basis, which came in below analyst estimates. On a quarter-on-quarter basis, the economy expanded only marginally. The slowing growth led to calls for Australia to implement a loose monetary policy. The business community too seems to be pessimistic about its prospects for 2015 as Christmas sales turned out to be bleak. Low demand, tax rates, increasing costs and competition have been cited by firms as affecting their businesses.
Encouragingly though, there have been signs of improvement in the housing market as approval to build new homes increased 11.4 percent in October 2014. The unemployment rate also unexpectedly came down in December to 6.1 percent from 6.2 percent in November as the number of people with jobs increased by 37,400 in the month, a report in the Sydney Morning Herald noted.
HONG KONG: CONSUMPTION DRIVES SURPRISE ECONOMIC GROWTH
Despite the pro-democracy ‘Occupy’ protests, Hong Kong’s economy posted a growth rate of 2.7 percent in the third quarter, exceeding expectations of 1.8 percent growth. The pick-up in domestic consumption and a relatively smaller drop in spending by tourists were the main drivers of growth during the quarter, according to a report in the South China Morning Post.
Private consumption, which accounts for two-thirds of the island’s GDP, increased 1.9 percent from the second quarter. Retail sales increased 4.8 percent in the month of September, thanks to higher sales of iPhone 6 and cars. However, the government said the optimism seen in the third quarter may not be expected in the last quarter of the year. Accordingly, the government revised its full-year growth estimates for the economy to 2.2 percent. Headline inflation forecast for 2014 was also reduced to 4.3 percent from the earlier view of 4.4 percent.
Hong Kong was in the headlines for the better part of the second half of 2014 due to protests demanding a truly democratic process to elect Hong Kong’s next leader. The widening wealth gap in Hong Kong, one of the other issues highlighted by protesters, is clearly in evidence in the housing market, with ownership unattainable for those who earn decent incomes. Housing prices, for instance, reached a record-high in November 2014, while the total value of homes sold in 2014 was the highest on record since 1996, according to a Reuters report.
NEW ZEALAND: ECONOMY ON THE RIGHT TRACK DESPITE FALL IN DAIRY PRICES
New Zealand’s economy received a shot in the arm as third-quarter growth increased 1 percent compared to the previous quarter, according to a Bloomberg news report. GDP growth was clocked above forecasts, thanks to increased output from farming and mining activities and aided by low interest rates and immigration, which encouraged consumption. Retail trading and manufacturing, as well as $31 billion of reconstruction activities undertaken in earthquake-hit Christchurch also contributed to growth. While exports, which contribute 30 percent of the economy declined, imports rose on increased buying of capital equipment such as aircraft.
Though the nearly 50 percent fall in dairy prices since February 2014 has led to reduced export revenues for the prominent dairy exporter, the country’s efforts at achieving fiscal consolidation seems to be intact with different political parties backing the government’s efforts, according to a Fitch report. However, the ratings agency noted that the loss of revenue from dairy exports would lead to the widening of New Zealand’s current-account deficit. Fitch added that the government has forecast a fiscal surplus of 0.2 percent of GDP in financial year 2016.
New Zealand’s Treasury Department said the budget deficit would be about $443 million in the 12-months ending June 2015 due to the fall in dairy prices and weak inflation. The government has forecast a growth rate of 3.3 percent for the first quarter of 2015, which is less than its initial estimates.
SINGAPORE: CITY-STATE EASES MONETARY POLICY TO TACKLE DEFLATION
Consumer prices in Asian economies such as Singapore and New Zealand are expected to trend below 2 percent on an annual basis, according to a Reuters report. With consumer prices in Singapore decreasing for the second month in December 2014, Singapore’s government recently decided to ease its monetary policy by keeping its dollar low against other currencies. While consumers will invariably benefit from lower prices, factories, corporate profits, and wage increases will be affected in the long run. Economists forecast headline inflation of 1.1 percent in 2015 in Singapore, taking into account the moderation in housing costs and prices of automobiles. However, core inflation has remained firm on the back of wage pressures in a tight labor market.
Singapore’s export-oriented economy has been experiencing a slowdown as the global economy is yet to recover fully. The city-state’s economic growth was clocked below expectations during the fourth quarter of 2014 as the manufacturing sector shrunk due to fluctuating global demand. Industrial production in Singapore has been declining for some months now as global demand remains weak. In fact, manufacturing dropped 1.9 percent in December from the year-ago period, according to the government. Production of electronic goods decreased by 2.4 percent, while petrochemicals slid 3.5 percent.
The problems in the corporate sector seem to be two-fold: some companies are hit by the restrictions on hiring cheaper foreign workers, while firms operating in the oil and gas industry face headwinds in the wake of the plunging price of crude.
According to an economic survey by the Monetary Authority of Singapore, economists on average expect the economy’s GDP to expand 3.0 percent in 2014, and 3.1 percent in 2015. Both the estimates are lower than previous forecasts. Besides external influences, some domestic factors are also to blame for the subdued economic outlook. The Singapore government’s move to reduce dependence on foreign workers, a politically sensitive issue in the city-state, has led to a tight labor market and has pushed up business costs for firms. The Lee government has slapped higher taxes for overseas workers and tightened the scrutiny process for employing non-Singaporeans in select industries.
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