Are Asian Economics Stabilizing?
 A
recent analysis of the most current Asian data on exports and industrial
production suggest that a bottom might have been reached.
Much has been made of "green
shoots" in the global economic discussion; green shoots are the early
and tentative signs of stabilization of macroeconomic conditions, which
are a prelude to recovery. Macroeconomic readings are based mainly on
a number of indicators, both real and financial, and whose rates of decline
have slowed after a virtual free-fall in the fourth quarter of 2008. Some
have even changed direction, but it is too early to determine the sustainability
of such movement.
From an analytical perspective, the
focus has been on the "second derivative", or the "rate
of change of the rate of change", which tells us how much more slowly
an indicator is declining.
Although not strictly identical to
this parameter, a widely used statistic is the seasonally adjusted annual
rate of growth (SAAR), which measures how much change there has been in
the indicator month-on-month (or quarter-on-quarter) after allowing for
seasonal effects (which are automatically eliminated when change is measured
in year-on-year terms).
To look for evidence of stabilization
in the Asia-Pacific region, we measured the month-on-month SAAR of two
critical monthly indicators—exports and industrial production. S&P
computed the rates from the beginning of 2008 until the latest available
(typically March 2009).
A distinct pattern emerged for most
countries. S&P analyzed the average month-on-month SAAR for 14 economies
in the region for three distinct two-month periods. The first period is
July-August 2008, in which virtually all these countries saw a transition
in these particular indicators from positive to negative. The second period
is November-December 2008, during which the indicators reached their lowest
levels. The third period is the most recent for which data are available,
February-March 2009. It is the comparison between the second and third
periods that suggests that economic activity has begun to stabilize in
the region.
With regard to exports, for all but
one country the average month-on-month SAAR during February-March 2009
is substantially higher than for November-December 2008. In five out of
the 13 countries in which the reversal is visible, the number is still
negative, although mostly significantly higher than it was in November-December
2008. In the remaining eight countries, the number has turned positive,
indicating that there is an absolute increase in the volume of exports
relative to the preceding month during this period. The one country whose
exports shrank at a faster rate in February-March 2009 than in November-December
2008 was India.
As far as industrial production is
concerned, the same pattern emerges, except that the country in which
the deceleration has intensified during February-March 2009 is Singapore.
For the remaining 13, the most recent period saw a significant increase
in month-on-month growth rates when compared with the trough of November-December
2008. Seven of the 13 countries saw the indicator transiting to positive
growth rates.
China may be playing a significant
role in this stabilization. Many forecasters have already begun to revise
their growth outlook for China in the current year upward (we have also
done so). The growth turnaround in China, even if it is modest, appears
to be contributing to an export revival in at least some countries in
the region. Commodities are obviously the biggest beneficiaries. However,
a combination of increases in regional and domestic demand seems to be
contributing to stabilization in industrial production as well.
These are, of course, early signs,
and we must be cautious in interpreting them. But, for the moment, the
region can take some comfort from the emergence of its bamboo shoots.
Baseline Scenario
The baseline scenario estimates a
decline of 3.1% in U.S. GDP in 2009, followed by a modest recovery in
2010, with the growth rate expected to be 1.3%. This means that GDP in
2010 will be lower than it was in 2008.
The major European economies will
perform with even greater sluggishness. The Eurozone is expected to decline
by 4.2% in 2009 and revert to a mere 0.5% growth in 2010.
The U.K. will decline a little less
sharply, by 3.3% in 2009, while returning to a positive 0.5% growth in
2010. Overall, the major markets for exports from the Asian region will
begin to stabilize by 2010, but clearly, exports to these countries will
make, at best, a negligible contribution to growth.
Under the circumstances, in the baseline
scenario for the region, countries that have a high exposure to the U.S.
and Europe are expected to do the worst. The more affluent economies in
the region are all expected to see declines in GDP during 2009, with moderate
positive growth in 2010. The larger economies in the region, on the other
hand, are likely to be able to sustain positive growth by virtue of strong
domestic drivers. A benign inflationary environment has facilitated strong
monetary expansion, while fiscal some cases, perhaps overused) to stimulate
domestic demand.
In fact, China is likely to play an
anchor role in the region, as its import linkages with other economies
transmit its domestic growth impulses to its trading partners. This may
be particularly so for commodity exporters but is also likely to benefit
exporters of capital goods, such as construction equipment, as China's
large fiscal stimulus begins to take effect. Recent patterns in industrial
production indices and, to an extent, export indices, reinforce the perception
that the region is beginning to stabilize ahead of any turnaround in the
U.S. and Europe. The combination of domestic stimulus and regional linkages
seems to be making a contribution.
However, despite a relatively reassuring
base scenario, in which the entire region returns to positive growth rates
in 2010, the risks to this scenario are not insignificant. The U.S. and
Europe could slide further into recession, reducing the prospects of positive
growth in 2010 and, along with it, any stabilization of exports from the
Asia-Pacific region. From the supply side, early signs of resurgence in
the prices of oil and other commodities pose a threat. A return to the
inflationary conditions of early 2008 may force central banks to reverse
course, potentially choking off a d hold. And, with China's performance
playing a critical role in the region's recovery, any weakness in its
policy transmission will have implications for the region as a whole.
Moderate Downside
Scenario
The main difference between the baseline
scenario and this one is the re-emergence of inflationary pressures, driven
by rising energy and commodity prices.
The price increases are partly the
result of increasing demand but are also the consequence of a broad-based
increase in global asset prices, a pattern that includes commodities.
As inflation takes hold, the ability of central banks to persist with
an expansionary monetary stance weakens and they may have to return to
a tightening stance sooner than is warranted by demand conditions. This
will result in a growth slowdown, affecting both consumer spending and
investment.
Extreme Downside Scenario
The pressures on growth are compounded
by persistent sluggishness in the U.S. and Europe as the monetary and
fiscal policy measures fail to overcome the weaknesses in financial markets
in these economies. Global capital flows remain subdued, affecting investment
in emerging economies, while exports do not recover, contributing to an
even slower growth rate in the Asia-Pacific region.
 AUSTRALIA
•
The Australian economy averted recession by growing at 0.4%
in the first quarter of 2009, aided by fiscal stimulus and a strong contribution
from net exports.
•
Headline inflation moderated to 2.5% in the first quarter
of 2009, slipping back within the Reserve Bank of Australia's 2%-3% target
range for the first time in over a year, thanks to lower financial costs
and petrol prices.
•
The central bank kept its key cash rate unchanged, at a record
low of 3.0%, in its May meeting, after cutting by a cumulative 425 bps
since September 2008.
•
Exports contracted by 0.8% in April, while imports declined
by 2.0%, resulting in a trade deficit of A$91 million due to lower iron
ore and coal prices.
NEW ZEALAND
•
The New Zealand economy contracted by 1.9% in the final quarter
of 2008 due to weak consumption and moderation in exports. Weak retail
sales, slump in house prices and high unemployment in first few months
of 2009 paint a bleak picture for the growth outlook this year.
•
Inflation eased to 3% in first quarter of 2009, down from
3.4% in the preceding quarter, thanks to falling crude oil prices, which
lowered the transport prices.
•
The central bank lowered its official cash rate by a further
50 bps, to a new record low of 2.5% in April to support falling economic
growth. It however kept the rate unchanged in June.
•
Exports declined by 4.6% in April as shipments of crude oil
and aluminium fell. Imports also contracted by 18.1%, resulting in a trade
surplus of NZ$276 million.India
•
The Indian economy grew at a higher-than-expected 5.8% in
the first quarter of 2009, from an upwardly revised alike number in the
fourth quarter of 2008, driven mainly by 21.5% growth in government expenditure.
•
Inflation based on wholesale prices eased further to 0.5%
in May, thanks to a decline in fuel and manufacturing products prices.
However, CPI based inflation stayed firm, at 8.7%, in April.
•
The central bank reduced both the repo and reverse repo rate
by 25 bps each to 4.75% and 3.25%, respectively, in April.
•
Continued weakness in external demand translated into exports
shrinking to an all-time low of 33.2% in April. Imports also dipped sharply
by 36.6%, resulting in a trade deficit of US$5.0 billion.
 HONG
KONG
•
The Hong Kong economy shrank by a hefty 7.8% in the first
quarter of 2009, down from the 2.5% contraction posted in the preceding
quarter due to steep decline in exports and investment.
•
Consumer price inflation moderated to 0.6% in April from 1.2%
in March, reflecting the recent easing of private housing rentals, food
prices, and weak demand conditions.
•
Exports tumbled by 18.2% in April, marking the sixth straight
month of contraction in shipments. Similarly, imports dipped by 17.0%,
resulting in a trade deficit of HK$16.3 billion.
SINGAPORE
•
The Singapore economy contracted by 10.1% in the first quarter
of 2009, according to the final estimates, up from the 11.5% fall noted
by the advance estimates. The manufacturing sector was the main driver
of the slowdown, while the construction sector posted positive growth
rates.
•
Inflation declined by 0.7% in April, in the biggest decline in nearly
four years, as transport, housing, and communications costs eased. The
government expects inflation to fall in the range of minus 1.0 to 0% in
2009.
•
Both exports and imports contracted by 26% and 31.1% in April,
resulting in a trade surplus of S$3.5 billion.
TAIWAN
•
Taiwan's economic growth slumped by a whopping 10.24% in the
first quarter of 2009, down from a contraction of 8.4% in the previous
quarter, as both domestic demand and exports weakened. In view of the
severity of the slowdown, the government lowered its 2009 growth outlook
to a decline of 4.25% from an earlier estimate of a 2.97% drop.
•
Inflation dropped for a fourth straight month in May to 0.08%
as fuel and electricity costs declined.
•
The central bank kept the key policy rate unchanged, at a
record-low 1.25% in its March meeting, its first pause after seven straight
cuts by a cumulative 238 bps since September 2008.
•
Weakness in external demand translated into a 31.4% fall in
exports in May, while imports dived by a record 39.1% thus taking the
trade surplus to US$3.16 billion.
 KOREA
•
The Korean economy contracted by 4.3% in the first quarter
of 2009, after plummeting by 3.4% in the previous quarter. However the
magnitude of the contraction was better-than-expected, thanks to government
spending and tax cuts.
•
Inflation moderated to a 20-month low of 2.7 % in May from
3.5% rise in April, due to a decline in energy prices.
•
The Bank of Korea held the interest rates steady for a third
consecutive month at a record low of 2.0% in its meeting in May,
•
Exports fell by 28.5% in May, while imports posted a 40.3% decline, resulting
in a trade surplus of US$5.1 billion.
JAPAN
•
Japan's economy shrank a sharp 8.8% in the first quarter
of 2009 after contracting by 4% in the fourth quarter of 2008, on a year-on-year
basis. On a quarterly annualized basis, the economy deteriorated by 14.2%.
•
Mild deflation persisted in March and April, hovering around
0%. Inflation was minus 0.3% and minus 0.1% in the respective months,
thanks to lower commodity prices and poor domestic demand.
•
Merchandise exports and imports decelerated at 45.5% and
36.6% respectively, in March and 39.1% and 35.8%, respectively, in April.
While the year-on-year export drops are significant, the exports have
picked up in each of the two months from the previous months, suggesting
signs of stability. These trends resulted in a trade surplus worth JPY67.7
billion in April.
CHINA
•
China's economy moderated further to 6.1% in first quarter
of 2009, following a 6.8% growth in the previous quarter, as exports and
investment continued to suffer from falling external and domestic demand,
and capital inflows.
•
Inflation continued to tread downward, however, thanks to
a rapid decline in food and other commodity prices. Consumer prices fell
by 1.5% in April after falling by 1.2% in March and 1.6% in February.
•
The central bank has kept the benchmark rates unchanged after
reducing the lending rate by 27bps to 5.31%. This stand suggests that
it wants to stem inflationary pressures, as the government is in the process
of swiftly expanding fiscal expenditure.
•
Exports fell by 22.6% in April and 26.3% in May, and imports
declined by 22.8% and 24.8%, respectively, in continuing trends. The monthly
trade surplus widened to US$ 13.4 billion in May from US$13.1billion in
April.Indonesia
•
Supported by consumer and government spending, Indonesia's
economy witnessed a mild slowdown in the first quarter compared with other
economies in the region. After growing at 5.2% in the fourth quarter of
2008, the economy posted a 4.4% growth in the first quarter of 2009, owing
primarily to a decline in demand for its commodity exports.
•
Inflation softened to a 17-month low of 6.0% in May from
7.3% in April and 7.9% in March thanks to a broad-based decline in inflationary
pressures.
•
The central bank reduced the policy rate for the seventh
consecutive month in June, as falling inflationary pressures paved the
way for a shift in policy stance toward growth. Interest rates were further
cut by 25bps to 7% in June, taking the cumulative cuts since December
last year to 250bps.
•
Exports decline moderated for the third consecutive month
to 22.6% in April, but imports dropped by a higher 45.2%, resulting in
a trade surplus of US$2 billion in April.
 MALAYSIA
•
Malaysia's economy contracted by 6.2% in the first quarter
of 2009, in its steepest decline in more than a decade, as both domestic
and external demand weakened significantly.
•
Inflation notched downward further to 3.0% in April from
3.5% in March and 3.7% in February, thanks to easing fuel and food costs.
•
The central bank reduced the benchmark interest rate by 50bps
to 2% in February, following a 75bps cut in January, but has kept the
rate constant since then.
•
Exports declined at a faster clip of 26.3% and imports by
22.4% in April. After growing by 3.4% and 10.3% in February and March,
respectively, on a month-on-month basis, exports dropped by 5.6% in April.
Trade surplus for April stands at MYR7.3 billion, lowest since last two
years.
THAILAND
•
The Thai economy slid into recession after the first-quarter
2009 GDP contracted by 7.1%, following a revised 4.2% contraction in the
fourth quarter of 2008, due to declining investment demand and exports.
•
Deflation was aggravated in May, at minus 3.3% year-on-year,
in the sharpest fall on record after minus 1.0% in April and minus 0.2%
in March, as demand pressures remain muted and commodity price pressures
were lessened.
•
As inflation remains below its target level of 0%-3.5%, the
risks seem low. The central bank held the benchmark interest rate at 1.25%
in its May meeting, after lowering it by 25bps in April and 50bps in February.
•
Export demand declined by 26.1% in April following 23.1%
contraction in March. But imports declined by a sharper 35.1% and 36.3%
in March and April respectively resulting in a trade surplus of US$595
million in April compared to US$2.1 billion in March.
PHILIPPINES
•
The Philippines' economic growth slumped to a 10-year low
of 0.4% in the first quarter of 2009, markedly lower than the 2.9% growth
rate posted in the fourth quarter of 2008, due to significant contraction
in investment demand and exports.
•
Consumer prices eased to an 18-month low of 3.3% in May from
4.8% in April, as oil and food costs stabilized and domestic demand fell.
•
The central bank cut the benchmark rate by 25bps each in
March, April, and May, bringing the rate to 17-year low of 4.25%, to stem
the fall in economic growth.
•
Export growth dropped by 30.8% in March and a larger 35.2%
in April, with a corresponding 36.2% decline in imports growth in March.
The trade deficit improved by 19.0% (to US$ 1.7 billion) in the first
quarter of 2009 compared to same period last year.
VIETNAM
•
Vietnam's economy plunged to 3.1% in the first quarter of
2009, reflecting the impact of a drop in global demand for its exports
and a drop in domestic investments.
•
Inflation continued to tread downward, dropping sharply to
a five-year low of 5.58% in May from 9.2% in April as commodity, fuel,
and food costs eased.
•
The State Bank of Vietnam reduced the prime lending interest
rate for the first time this year, by 150bps to 7% on April 1, after cutting
it by 550bps in the final quarter of 2008.
•
The contraction in exports-demand moderated to 14.6% in May
from a decline of 16.1% in April. Imports dipped at a faster clip of 26.3%
in May, resulting in a trade deficit of US$1.5 billion.
Gordon Feller
|
Jade
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