Developed Asia Pacific: Economic Review June 2011
Thomas White International
July 12, 2011
Developed Asia Pacific economies continued to face headwinds in June as the outlook for demand from both developed markets such as the U.S. and Europe, and emerging markets cooled. In the U.S., a lukewarm labor market caused concerns about the pace of economic recovery. In the emerging markets, persistent inflation fears were prompting higher interest rates. Both these factors are putting pressure on exports from Developed Asia Pacific economies. Japan, which specializes in exporting machinery and consumer durables, is feeling the heat of a slowdown in demand from consumer countries. In Japan’s case, supply-chain problems have been blamed for a slowdown in exports. Singapore too faced pressure on exports due to weakness in the electronics segment.
Key developed Asia Pacific economies such as Singapore, Australia and Hong Kong were also worried about rising inflation. In all three economies, inflation was fast spreading from price volatile items such as food and fuel to structural inputs like labor. Tighter monetary conditions are widely expected in most of these economies sooner rather than later. New Zealand, however, has been one of the lucky beneficiaries of rising food prices across many emerging markets. As China encouraged imports of higher quantities of dairy and meat products to curb rising food prices at home, New Zealand’s food suppliers were busy exporting their way out of trouble.
At a Glance
- Japan: Exports fell 10.3 percent in May, the second consecutive monthly decline. The IMF forecasted a 0.7 percent contraction in Japan’s economy for 2011, reversing its earlier prediction of a 1.7 percent expansion.
- Australia: A strong Australian dollar is hurting the country’s manufacturing and services industry. Despite rising employment in the mining industry, Australia’s economy lost 22,000 full-time jobs.
- New Zealand: Exports grew 15 percent during May as demand for products such as pleasure boats, dairy and wine jumped.
- Hong Kong: Rising inflation and rentals costs attracted measures such as a distribution of the budget surplus to the country’s citizens. Lackluster IPOs in Hong Kong are dampening investor sentiments.
- Singapore: Manufacturing and exports growth slowed in response to a stronger domestic currency.
Japan: Export-engine takes a hit from the demand-side as politicians wrangle
One of Japan’s important sources of economic strength, exports, is sputtering. The weakness in exports in the months after the March 2011 earthquake was largely attributed to supply-side problems. Productive capacity lost to the earthquake and widespread damage to roads and transport networks were largely blamed for the fall in exports. However, Japanese exports are now expected to take a hit from the demand-side as well. Monetary tightening in China, uncertainties about the recovery in the U.S. and debt problems in the European Union are largely expected to put downward pressure on Japanese exports in the near term. The strengthening Japanese yen too is causing headaches for large domestic exporters. In the past four years, the Japanese yen has strengthened more than 50 percent against the U.S. dollar.
Toyota, Honda and Nissan, the three largest car makers of Japan are feeling the heat of a strong yen against the U.S. dollar. If the yen treads around 80 per U.S. dollar, Toyota estimates that it might have to cut costs by as much as 20 percent in order to compete in the global auto market. To escape the currency appreciation problem, many car makers intend to step up the plan to shift their production facilities away from Japan. Japanese exports, which tumbled nearly 12.3 percent in April, declined by 10.3 percent in May over the year-ago period. The fall in exports is also hurting the overall economy. In April, the International Monetary Fund (IMF), which had predicted a 1.7 percent growth in Japan’s 2011 GDP, now expects the GDP to shrink 0.7 percent for the year.
Still, many of Japan’s export-based industries are making a spirited comeback from the March 2011 earthquake. Many companies in the electronics and car industries have increased their output to pre-earthquake levels. Nissan, the Japanese car maker that suffered a 50 percent plunge in volumes during March and April has increased output substantially, even though pre-earthquake production figures will only be achieved by October this year.
Meanwhile, political squabbles in Tokyo, which has largely been blamed for Japan’s economic malaise, intensified. Japan’s beleaguered Prime Minister, Naoto Kan, has agreed to step down under the stipulation that his supplementary fund required for reconstruction spending gets a nod of approval. If Mr. Kan steps down as promised, Japan would be searching for its sixth prime minister in just five years. Furthermore, Mr. Kan’s stepping down is largely expected to set-off a succession struggle, slowing down reconstruction activities further.
Yet, some of Mr. Kan’s plans to address Japan’s finances are getting some approval. A government advisory council recommended higher taxes to finance reconstruction activities. Mr. Kan’s proposal to raise sales taxes to 10 percent by 2016 for financing the government has been widely opposed by both ruling and the opposition parties. However, the opposition to taxes, which is largely seen as political, is largely expected to fade as the country’s political landscape changes.
Australia’s economy is sending mixed signals about its strength. While the country’s resource-rich mining states continued to attract substantial amounts of investments, Australia’s manufacturing and services sectors remained subdued. This was evident from the country’s employment figures. While the mining sector, which is increasingly becoming more capital-intensive, continued to add jobs, manufacturing and services continued to shed jobs. Consequently, full-time jobs fell by nearly 22,000 in May. Australia has lost nearly 70,000 jobs since the beginning of the second quarter of this year, the biggest decline in nearly two years.
The boom in mining is also fast using up spare capacity, threatening to push up inflation. Consequently, even with rising job-loss figures, inflationary pressures are going up in the resource-rich country. This in turn is affecting consumer confidence across Australia. The Westpac-Melbourne consumer sentiment index fell, to a two-year low in June.
Worried about rising inflationary pressures, the Reserve Bank of Australia (RBA), which had paused increasing interest rates in late 2010, said it might resume hiking interest rates. In a survey by Bloomberg the number of interest-rate and currency traders, who believe that Australia’s interest rates will shoot up after the third quarter, also rose in June.
The RBA, however, refrained from hiking interest rates in its June 2011 policy meeting, citing the problems faced by the country’s manufacturing sector. Australia’s manufacturing sector is facing intense pressure from a strengthening Australian dollar against the U.S. dollar. Many local industries such as wine-making and tourism are struggling to compete in the international markets as Australia’s domestic currency climbed to a nearly 20-year high in June. A rate hike in June will likely not only increase borrowing costs for Australia’s companies but also will result in a further strengthening of the currency.
The Australian government for its part is trying not to make life difficult for its private enterprises. To keep borrowing costs low for the country’s private industries, the government has said that it will keep its spending low and try not to compete with private enterprises for funds.
New Zealand: Exports keep the economic machine alive
New Zealand’s earthquake-hit economy is reviving at a healthy pace. The country’s trade figures suggest that both exports and imports are rising in tandem.
The country, which depends substantially on trade for economic growth, has made significant strides in the last three months. In May, the export of many goods, in which New Zealand has a comparative advantage, jumped. The exports of pleasure boats rose robustly due to strong demand from neighboring Australia. Sales of meat and dairy products too jumped as demand from emerging Asian economies such as China and India grew. With this, the country’s exports grew by almost 15 percent in May over the year-ago period, despite a strong currency.
As well, wine-makers in New Zealand who were facing a lull since early 2010, started contributing to rising exports. A bumper crop during the year and the weakness of Australian wine exporters came together to help New Zealand increase wine production. The country’s wine exports are likely to jump 13 percent to nearly 160 million liters for the year ending June 30, 2011.
Furthermore, import figures too suggest a strong expansion in New Zealand’s economy. The 17 percent jump in the import of capital goods, such as industrial equipment and machinery, is largely viewed as a harbinger of further growth.
Yet, there was some bad news for New Zealand from the human resources front. A recently published report claimed that the New Zealand suffered one of the most prolonged losses of migrants in 2010. In recent times, skilled immigrants, who help boost economic activity, have increasingly left New Zealand to settle with neighboring Australia.
New Zealand is trying to reverse the situation in some ingenious ways. The country’s Prime Minister John Key visited India in June to draft a free trade agreement with the country. The two countries plan to triple bilateral trade to nearly $3 billion by 2015. While the deal is yet to be concluded, both sides are trying to gain from the partnership. While India will try to export some of its labor to New Zealand, New Zealand will seek to gain a foothold in the country’s dairy and food markets.
Hong Kong: Capital Markets face increasing competition
Hong Kong’s capital markets, long a gateway for many companies trying to enter China, are showing some signs of weariness. As China boomed in the past two years, many companies from an array of industries such as retail to luxury goods chose to list in Hong Kong. In 2010, Hong Kong was the world’s largest IPO market with companies raising as much as US$57.7 billion from 87 listings.
These days, increasing competition from other cities such as Shanghai and Singapore coupled with an anticipated slowdown in China is threatening Hong Kong’s status as the Asia’s preeminent financial center. As of May 2011, the number of companies that launched an IPO in Hong Kong stood at a mere 18. Even Singapore, which saw 43 companies listing on its exchanges, outpaced Hong Kong. Hong Kong, however, raised nearly $18 billion in equity capital until May 2011, second only to the U.S. A number of stocks that were listed in Hong Kong this year had registered lackluster performance.
Meanwhile, Hong Kong’s domestic economy is facing challenges from persistently high inflation. Inflation in Hong Kong accelerated to a 34-month high of 5.2 percent. Inflation in the region is being fueled by rising food prices and a relentless jump in home rentals.
Hong Kong’s chief executive Donald Tsang is struggling to control the popular anger over rising food costs and unaffordable housing prices. Mr. Tsang, who has another year left before his tenure ends as Hong Kong’s chief executive, has seen his approval ratings plummet to record low levels.
And that is preventing him from keeping some of the promises he made in 2007. Chief among these is the promise that Mr. Tsang made to cut corporate taxes when he ran for office in 2007. Although the chief executive trimmed the corporate tax rate by half a percentage point to 16.5 percent in 2008, he is yet to bring it down to the 15 percent level that he had previously pledged. Hong Kong’s inability to cut corporate taxes is one factor narrowing the lead that it once enjoyed in attracting new businesses. During the late 1990’s, the corporate tax rate in Hong Kong was almost ten percentage points lower than that of Singapore. However, that gap has now narrowed to just 0.5 percentage points. Companies that would have otherwise set up shop in Hong Kong now have a choice. Singapore’s economy, which was just 55 percent of Hong Kong’s in 1998, is today nearly the same size.
Meanwhile, Mr. Tsang is also trying to assuage popular anger over rising prices by distributing Hong Kong’s budget surplus in the form of hand-outs to its population. He is also giving subsidized housing in Hong Kong another look. Each adult permanent citizen in Hong Kong will get a HK$6000 ($700) check from the government starting this November. The government has allocated nearly HK$37.98 billion ($4.4 billion) for distributing money to its citizens. Further, in mid-June, a representative from Mr. Tsang’s office had announced that a plan that would allow Hong Kong’s citizens to buy property at prices 40 percent below that of the market price would be considered. Such a plan, which was envisioned in the early 2000’s, was abandoned in 2003.
Singapore: Soaring labor costs call for a further strengthening of currency
Singapore’s roaring economy is stoking inflation. In May, the city-state’s consumer price index jumped 4.5 percent, much higher than consensus estimates of 4.1 percent. In recent months, the hike in fuel prices had pushed up the cost of food and transportation. However, some of structural inputs such as labor are contributing to rising prices in the country as well.
Singapore’s demand for labor is shooting up phenomenally. The country’s unemployment rate fell to 1.9 percent during the first quarter of 2011, a three-year low. But the demand for labor is pushing the cost of labor up further. According to a survey by Manpower, an executive recruiting firm, companies across Singapore hiked average wages by nearly 8.5 percent during the first quarter of the year to retain employees. Such a sharp rise in wages is a source of concern for the country’s policy makers, as wage-driven inflation could prove to be more persistent.
Consequently, the Monetary Authority of Singapore, which is responsible for maintaining price stability in the country, has said it will allow the country’s currency to strengthen further. A strengthened Singapore dollar could make the country’s goods expensive abroad, which in turn could help the domestic economy from overheating. Singapore’s dollar has strengthened nearly 12 percent against the U.S. dollar in the past year.
The effects of a strengthened dollar are already helping moderate segments of the country’s economy. Manufacturing, which accounts for a quarter of the country’s output, is responding sharply to the strengthening currency. Singapore’s industrial production fell 17.5 percent for the second consecutive month in May. The country’s electronic production tumbled 5.4 percent, primarily due to reduced contract-manufacturing and the assembly of electronics products. Nonetheless, the country’s overall exports expanded in May as higher output from drug and pharmaceutical manufacturers offset a fall in electronic goods output. Still, the country’s exports for 2011 are widely expected to slow down as the electronics industry is likely to grow only at about a third of the pace of 2010. Singapore’s central bank estimates inflation for 2011 to range between 3 percent and 4 percent.
(c) Thomas White International