Developed Asia Pacific: Economic Review May 2011
Thomas White International
June 13, 2011
Developed Asia Pacific economies largely managed to boost output by leaning on exports in May. For some of the economies affected by natural disasters earlier this year, exports proved to be a blessing. Australia, which was affected by floods in February this year, not only managed to increase raw material exports but also gained by the investments associated with its export-oriented mining sector. Earthquake-hit New Zealand and Japan, however, faced difficulties in increasing output. New Zealand, which depends on food exports and tourism, suffered because of a strong domestic currency. Japan on the other hand made significant strides in putting together the supply chain that was badly damaged in the aftermath of the March earthquake. Some of Japan’s automakers made headway in bringing back the productive capacity lost to the tsunami. However, politics as usual in Tokyo prevented the country’s government from contributing strongly to the recovery. Japan’s lawmakers were on a collision course over funding a supplementary budget required for rebuilding the country. In Singapore and Hong Kong, inflationary pressures abounded primarily due rising real estate prices. Both countries were trying a slew of measures to cool down property prices.
At a Glance
Japan: Japan’s GDP fell 3.7 percent as industrial output shrank following a devastating earthquake. Uncertainty over raising the consumption tax in Japan’s Parliament is hampering a supplementary budget aimed at reconstruction spending.
Australia: Robust output from the mining sector is helping the economy. A strong Australian dollar however, is hitting the manufacturing and tourism industries.
New Zealand: Food exports to China surged in April despite a strong currency. The government plans to curb spending over the next three to four years to keep the budget deficit under control.
Hong Kong: Inflation surged in April on strong demand for essentials. Property prices soared to all-time high on abundant liquidity.
Singapore: Supply-chain issues hit the country’s electronics industry in April. Still, exports grow on the strength of the chemicals and pharma industries.
Japan: Government struggles to address crisis as economy slips
Japan’s economy is taking a hit from many sides. The earthquake that struck Japan in March 2011 is being held responsible for all the troubles that Japan now faces. First of all, the earthquake destroyed industrial centers and caused damaged to the tune of $310 billion. The earthquake has also impacted the country’s GDP growth for the quarter ended March 2011. GDP dropped nearly 3.7 percent during the quarter as all three key components of the economy- consumption, net exports and investments- dropped substantially. Japan’s GDP is nearly at a 20-year low in nominal terms. Currently, the government’s stimulus initiatives are hoped to provide the much-needed fillip for Japan’s economy.
The Japanese consumer, who was already being blamed for not spending enough even before the earthquake, became even more frugal after the disaster. Discretionary household spending such as eating out and entertainment spending fell substantially after the earthquake, as essentials such as power and transportation became scarcer. Although many economists see this as a temporary phenomenon, the pullback from Japanese consumers resulted in the worst fall in household spending since the financial crisis of 2008. Consumer spending slumped 0.6 percent during the quarter from the year-ago period.
Industrial activity too came under pressure as companies uncertain about availability of power and disturbances in the supply chain were hesitant to invest more. They also dived into their inventory rather than buying more. As well, the resulting fall in demand reduced hiring and had an adverse impact on wages. Industrial production plunged nearly 15.5 percent just after the earthquake, a much steeper fall than the 8.6 percent seen just after the financial crisis. However, machinery orders in April started rising thanks to recoveries in car manufacturing and electronics.
Many companies in these industries have made strides in restoring capacity. For example, production at Renesas Electronics, a maker of microchips for the car industry, is now back on its feet. This in turn has helped car maker Toyota raise production in many of its factories.
Nonetheless, a number of Japanese car makers including Toyota, Honda and Nissan are likely to lose market share to both American and European car makers this year. GM, which lost its crown as the world’s largest car maker to Japan in 2008, is widely expected to regain that title. Exports from Japanese companies in the coming months will also trend downwards. According to the Japanese Finance Ministry, overall exports from Japan have fallen nearly 1.4 percent and Japan’s current account surplus shrank 34 percent during April.
Although the private sector’s response to the earthquake has largely been commended, the Japanese government’s response to the crisis has been widely criticized. Japan’s ruling party, the Democratic Party of Japan (DPJ), which passed an emergency budget soon after the crisis, is now in a quandary over how to finance a supplemental budget. While the country’s Prime Minister, Naoto Kan, wants to increase the cost of consumption by raising taxes, some of his colleagues are reportedly against such an idea. The head of DPJ’s tax panel, Sakihito Ozawa, has called for the Prime Minister to resist raising taxes and instead fund the budget through more bond sales. Such a move could aggravate Japan’s debt, which is already twice the size of the country’s GDP.
As he struggles to gather support for his tax plan, public support for the country’s Prime Minister is already flagging, even within his own party.
Iron and coal, the two main resources that form the bedrock of Australia’s current economy may well be the ones causing headaches for the country’s policy makers. As developing nations such as China and India industrialize demand for Australia’s coal has gone many folds.
In recent years, billions of dollars of investments have gone into Australia’s resource rich provinces like Queensland, the home to some of the world’s largest iron and coal mines. The resource boom has driven up the demand for almost every other kind of resource ranging from capital machinery to labor.
But the demand from the mining sector has also given way to some negative consequences such as an elevated pricing pressure on all other resources. This had stoked inflationary pressures. The country’s central bank, the Reserve Bank of Australia, moved in to contain inflation much earlier than any other developed economy. The bank initiated the higher interest rate cycle in Australia early in 2009, at a time when all other developed economies were busy loosening monetary policy.
A series of interest rate rises since 2009 has taken Australia’s borrowing costs to around 4.75 percent. This is almost three to four percentage points higher than that in the U.S. and Europe. Consequently, capital, which favors higher interest rates, has continued to flow unabatedly into Australia. These effects have pushed the value of Australia’s dollar to an all-time high. In early May, the Australian dollar touched $1.10 versus the U.S. dollar, the highest level since Australia let its currency float in 1983.
The strong Australian dollar is hampering many other export-based industries in the country. Tourism, which thrives with a weak domestic currency, is also under severe strain. One of the largest airlines in the country, Qantas, has posted four continuous months of declining passenger yields.
A host of companies in manufacturing are shedding jobs even as the mining industry continues its hiring. This has given rise to volatility in Australia’s job market, which has see-sawed in the past three to four months. After adding 36,000 jobs in March, Australia’s employers shed 22,000 jobs in April. Most of the losses were incurred in the services and the manufacturing industries. The loss in many sectors has resulted in weak consumer and household spending and has started affecting retail businesses across the country.
Australia’s central bank refrained from raising interest rates in May, but has cautioned that interest rates may go up sooner rather than later. For its part, Australia’s government has decided to curb spending in order to prevent inflation from rising. The government’s decision will put an end to 23 continuous years of increases in spending. The government has also said that it will return the country to a budget surplus by curbing spending.
New Zealand: Government cuts social spending as debt climbs
New Zealand’s exports once again helped the economy, which was hit by a devastating earthquake early this year. Agricultural commodities were especially in high demand and rose for the eighth continuous month in April. New Zealand’s exports to China in particular were impressive, surging 42 percent for the year ended March 2011. The country’s central bank had cut interest rates by 50 basis points in March to stimulate demand in the economy after the earthquake in February.
However, the country’s currency, the New Zealand dollar, has appreciated almost 18 percent this year against the U.S. dollar and that has hampered some parts of the economy. Tourism in particular was hard hit with spending in the sector falling nearly 6.1 percent in the year ended March 2011. Average visitor spending in New Zealand too fell this year as inbound tourism from many developed countries like the U.S. and the U.K. fell. However, the tourism industry is largely expected to get a fillip from the Rugby World Cup scheduled for later this year in New Zealand. Organizers of the event expect nearly 85,000 visitors.
In other developments, the New Zealand government announced that it will cut pensions and review social payments in order to balance its budget. The country, which had borrowed heavily to fund reconstruction spending after the Christchurch earthquake, is now trying to maintain its investment grade rating from credit ratings agencies. The country’s deficit in 2011 was expected to jump to 20 percent of GDP from 14.1 percent in 2010, primarily due to borrowings for reconstruction spending. Credit agency Standard & Poor’s has kept New Zealand’s sovereign debt on negative outlook. New Zealand expects its budget to return to a surplus by 2015 by cutting spending by around NZ$5 billion ($4.1 billion). The government also claimed that without the spending cuts, New Zealand’s deficit would have accelerated to nearly 35 percent of the country’s GDP.
Hong Kong: Exports jump amidst rising inflation
Hong Kong’s GDP for the first quarter of the year ended March 2011 grew by nearly 7.2 percent on strong private consumption and robust exports. The country’s exports, which rose nearly 17 percent on strong demand from China and other parts of Asia, were particularly helpful.
However, the strong growth in the economy, together with the government’s plan to distribute its budget surplus in the form of handouts, and the relentless rise in property places, are stoking inflationary pressures. Inflation in April already touched a 32-month high of 4.6 percent. The government has now forecasted that 2011 inflation will rise to around 5.4 percent, the highest level in nearly 14 years.
Property prices and rents have been at the center of the inflation story in Hong Kong. Many economists believe that a bubble-like situation prevails in the country’s real estate sector. However, three land sales by the government in Hong Kong fetched record revenues for the government in May. The Hang Seng Property Index, which tracks the stock price movements of the city’s seven largest developers, jumped nearly 1.2 percent this year, even above the broader Hang Seng Index.
Consequently, many analysts believe that there is further room for property prices to appreciate. The government has said that property prices are now at levels above the previous peak touched in 1997 just before the Asian Financial Crisis. Hong Kong lacks an independent monetary policy, as the Hong Kong dollar is pegged with U.S. dollar. Therefore, Hong Kong lacks some of the conventional monetary tools required to regulate property prices. To correct this, the country is trying various transaction taxes to bring down property prices. It is also trying to make surplus land available to increase the supply of houses.
Singapore: Domestic consumption and tourism fuel economy
Singapore’s economy, which reported a 22.5 percent GDP growth during the first quarter of 2011, is still going strong. Domestic consumption and a buoyant tourism industry have helped the country grow at the fastest pace among other Southeast Asian nations.
Singapore’s export-based economy has thus far managed to grow primarily by capitalizing on the modest recovery in Europe, the improved economic conditions in the U.S., and a strong performance in many of the emerging markets. Although, Singapore’s exports to Japan, one of its largest trading partners, were dented in the aftermath of the Japan earthquake, the country managed to raise its exports to other countries such as Germany, China and Brazil.
Still, problems in Japan’s electronics industry, which plays an integral role in the world’s electronic supply chain, have caused troubles for Singapore as well. Singapore’s electronic industry shipped fewer electronic goods to customers in Hong Kong and the U.S. Many of Singapore’s contract manufacturers of electronics goods reported nearly a 10 percent fall in shipments. However, strong output from chemical and biomedical companies helped exports during April.
On the other hand, Singapore started tightening its monetary policy by letting its currency appreciate. Inflationary pressures, which had built over the past several months due to rising property prices, rents, and food items, resulted in the country’s ruling party ending up with the lowest share of popular votes, although it was returned back to power. The People’s Action Party has ruled Singapore since 1965. The country’s monetary authority has let its currency strengthen nearly 13 percent over the U.S. dollar since the beginning of 2011 to fight inflation. Singapore has forecasted that inflation will range between 3 and 4 percent.
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