Developed Asia Pacific: Economic Review July 2011
Thomas White International
August 12, 2011
Despite global headwinds to trade and growth, developed Asia Pacific economies managed to make the most of their economic potential to increase output across key industries. Although trade prospects from the U.S. and the Euro-zone were lukewarm, demand from emerging Asian economies lent a supporting hand to developed exporters such as Japan and Singapore. Further, reconstruction spending in some key countries in the region, like Japan and New Zealand, also played a key role in improving labor markets. In Australia, however, labor markets turned sour as job losses inched up during the quarter. Currency issues have been troubling resource-rich Australia by hitting the services and tourism-based industries in the past year. Moreover, inflationary pressures have become acute in Singapore and Hong Kong mainly due to labor shortage and a relentless rise in property prices. Even New Zealand, which saw demand shrink in the wake of the February earthquake, is facing higher inflation. Monetary policy in these three economies is widely expected to tighten in the near future. In Australia, however, the possibility of an interest-rate hike in the coming months declined as job markets and consequently consumer confidence turned sour.
But the biggest worry for all developed Asian economies originates from China, the world’s second-largest economy. Although China has managed to put up a resilient economic performance even during the second quarter, developed Asian economies that depend on China for their export industries are worried about a weakening in the Chinese economy in the quarters ahead. The Wall Street Journal, citing economists from private banks, reported that exports from Australia and Japan are expected to come under pressure if China experiences a slowdown.
At a Glance
- Japan: Economy regained footing supported by auto and construction companies. However, uncertainties over nuclear power and scarcity of electricity is expected to dampen momentum going forward
- Australia: Strong Australian dollar is troubling the services, tourism and even some parts of other industries such as wine-making. With employment and consumer-confidence suffering, Australia’s retail segment is facing troubles.
- New Zealand: Recovering labor market, soaring food exports and rising demand from Asian countries have brought back economic growth much-faster than expected.
- Hong Kong: Property prices and rising prices of imported food from China are fueling inflation.
- Singapore: An otherwise red-hot economy suffered due to week exports to the U.S. and Europe. Although trade within Asia has helped the island, inflation is expected to weigh on growth going forward.
Japan: Mixed news from the world’s third-largest economy
Japan is receiving a steady stream of vacillating economic news – some good and some not so. First, the good news: the supply-side components of Japan’s economy such as infrastructure, roads, and factories that were destroyed badly in the March tsunami and earthquake are healing at a much faster pace than expected. So much so that Toyota, Japan’s largest car maker, said that it would be able to supply all models of cars without any interruption starting in October. Other car makers, notably Nissan, also have said that constraints arising from supplier issues are dissipating fast.
The statistics seemed to corroborate the improving scenario in the world’s third-largest economy. During June, Japan’s industrial production rose at the quickest monthly pace in nearly 50 years. Auto production, which was falling relentlessly in the aftermath of the earthquake, has also stabilized. All these factors helped arrest the sharp downward trend in Japanese exports in June. Despite weakening growth, countries such as China and even Europe continued to import more from Japan.
Given this scenario, Japan’s construction equipment companies in particular are making hay. Komatsu, the world’s second-largest manufacturer of construction machines reported a 30 percent growth in orders. Some of this growth for the construction company actually came from Japan itself, where the government is pumping in hundreds of billions of dollars to fix the country’s broken bridges and damaged roads.
Encouraged by these prospects, seven of Japan’s nine regions upgraded the assessment of their respective economies. Key indicators measuring industrial production and consumer spending in most parts of Japan were on the upswing. Even the northeastern parts of Japan, the ones that bore the brunt of the March earthquake, were reporting a strong comeback.
The bad news for Japan, however, is the country’s insufficient power supply. The problem though is as much political as it is due to the scarcity of the commodity. There is much soul-searching in Japan about the use of nuclear energy to meet the country’s demand for electricity following the tsunami-triggered nuclear disaster in Fukushima. While popular opposition to nuclear energy was high immediately after the Fukushima incident, many opinion polls have started to suggest an ambivalent public stance towards nuclear power. Although a majority of Japanese people do not seem to favor building more nuclear reactors, 37 percent of those surveyed in an opinion poll by Mainichi, a national daily, were in favor of opening those reactors that have been shuttered. Even Osaka, Japan’s second-largest business hub after Tokyo, which was largely unaffected by power-supply issues, started facing power scarcity when a key power producer closed a nuclear-powered plant. Consumers in the area, which include large consumer-electronics giants like Panasonic, have been asked to cut electricity consumption by 15 percent.
The country’s political brass also seems divided over the nuclear industry. Japan’s embattled current prime minister Naoto Kan, who plans to resign from his post in the coming months, wants the country to reduce the amount of power it generates from nuclear sources despite opposition within his party. This has resulted in some confusion over how Japan will produce power in the long term, and one of the country’s influential business lobbies, the Japan Federation of Business Associations, said that companies are holding back investments over the question.
Another source of trouble for the country is stemming from a strong yen, Japan’s currency. Some economists fear that the strength of the yen, which at around 78 per U.S. dollar is close to a multi-year high, would hit imports and prematurely cripple the recovery. Already, Japan’s exports to the U.S. one of the country’s key markets, is under pressure due to a weak recovery in the country. A strong yen is expected to intensify this problem for Japan.
Australia’s natural resources-fueled economy, which took a knock from a historic flood and a raging forest fire during the early part of the year, has come under further strain. This is a sea-change in the country’s economy that even a month ago seemed to be recovering fast thanks to record investments in mining and energy exploration industries. In May, Bloomberg had reported that the money pumped into the oil and natural gas fields and coal mines in Western Australia had pushed unemployment to such low levels that the country’s central bankers were even worried about inflation. Even the number of currency and interest-rate traders that expected an interest rate hike to combat overheating had steadily jumped until June.
But things have changed quite dramatically in the last two months. Even though total unemployment figures have been falling, Australians outside the resource-rich regions, who are employed in the manufacturing, services and tourism industries, have been reportedly worse off. In the April-June quarter, the economy lost nearly 5,400 jobs. The strong Australian dollar, nicknamed the Aussie, which has jumped 22 percent against the U.S. dollar in the last 12 months, has eroded the competitiveness of many of these industries. Consequently, economic activity as a whole is losing steam in Australia. The country’s consumer sentiment index fell 8.3 percent in July compared to June, the largest decline since the global financial crisis. With many Australians penny-pinching, retail sales of items such as clothes and footwear also fell in June.
This has affected the entire retail industry across Australia. The S&P/ASX retailing index that tracks the performance of large retail chains in Australia plummeted almost 13 percent during early July. Economists have warned that the slump in the sector could force some retail stores to default on rental and lease commitments, and in some cases result in significant store-closures.
Consequently, the country’s central bank, which saw a possibility of raising interest rates towards the later part of 2011, is now planning to delay hiking rates further. Economists from four commercial banks actually foresee the central bank cutting rates towards December 2011, if economic activity slumped further.
Adding to the uncertainty, Australia’s ruling Labor government has come up with a mechanism to price carbon emissions in an attempt to control the amount of green-house gas emitted. Australia is the 16th largest emitter of greenhouse gases in the world. Almost 75 percent of the country’s electricity is generated from coal, one of the dirtiest sources of energy.
According to the proposal, the Labor government will collect nearly A$23 for every ton of carbon emitted by the steel, plastics, chemicals, aluminum, and paper and pulp industries starting from mid-2012. What’s more, the government is planning a series of negotiations to close coal-burning power plants by 2020.
Understandably, most of Australia’s industries have opposed the carbon pricing program saying that the extra cost arising out of the proposal puts them at a disadvantage compared to industries in countries without such a tax. The Australian industry has pointed out that none of the other countries with abundant reserves of coal such as Canada, South Africa and Indonesia have such a tax. The Minerals Council of Australia that represents the mining industry of the country has vigorously opposed the tax, saying that it would prevent investments of nearly A$25 billion (US$28 billion) in the mining industry and will result in the loss of over 20,000 jobs.
For its part, the Labor government has said that it will try to offset the burden on the industry during the initial years through generous subsidies. The government has also said that it will compensate any rise in electricity bills arising from the tax. However, by its own admission, the carbon tax could increase fixed-costs of power production by 2.5 percent during the initial years, potentially stirring up inflation.
New Zealand: Manufacturing and exports accelerate growth
New Zealand’s economy, which suffered a strong blow from an earthquake in February, is recovering at a strong pace. Robust output in manufacturing, food and beverage, and metal and mineral related exports offset the slump in the services industry, which was hit the hardest during the February earthquake. This helped the island’s economy jump 0.8 percent in the March quarter, almost double the rate forecasted. Even the GDP for the full year ended March was clocked at 1.5 percent, much higher than the IMF estimate of 1 percent. Economists at major banks in the region had predicted that the February earthquake would wipe out almost two percentage points of growth.
The strong growth in the economy has also started generating jobs for the country. Job vacancies rose 2.3 percent in June according to the New Zealand’s Department of Labor. Companies advertising for skilled jobs too jumped 1.5 percent in June over May. The maximum amount of growth in vacancies in the skilled labor section has come from the Southern Island and Auckland regions of New Zealand.
While New Zealand’s growth surprised economists on the positive side, it is nevertheless stoking inflation. Fueled by high oil and food prices, consumer prices in New Zealand climbed 0.7 percent in the sceond quarter. The rise in consumer prices has also been accompanied by higher core inflation. Economists have blamed higher construction and insurance costs associated with the property sector for rising inflation. The cost of construction jumped almost 1 percent during June in the country. New Zealand’s government has also cordoned off a part of the earthquake-prone areas in Christchurch and has asked residents living in certain danger zones to move to other safer parts of the city. This has put pressure on housing prices in the suburbs of Christchurch.
The country’s monetary policy is also expected to reverse direction quickly in response to the rapid jump in prices. Just after the earthquake, New Zealand’s central bank loosened monetary policy, cutting interest rates by 50 basis points to 2.5 percent. During that time, private economists at commercial banks in the region did not anticipate any interest rate hikes from New Zealand until 2012. But with growth returning faster than anticipated, more than 50 percent of the economists surveyed by Bloomberg expect a rate hike in December, while some others expect policy tightening to begin as early as this September.
On another note, the country’s domestic currency, the New Zealand dollar, despite strengthening against the U.S. dollar has remained competitive against the neighboring Australian dollar. New Zealand’s mineral-rich neighbor is splurging on the luxury yachts that the Kiwis make. The number of luxury yachts owned by Australians has now exceeded 100. A significant number of them were bought in the past six months, helping New Zealand’s yacht-making industry. In the last quarter export revenues for New Zealand from yacht-making grew almost 30 percent thanks to the Australian market.
Hong Kong: Property prices and spill-over from China fuel inflation
Hong Kong’s inflation is hitting the roof. A combination of factors like rising food prices and soaring rents has set fire to the prices of many essential commodities. A newly enacted minimum-wage law in May did not help either. Consequently, inflation in the Chinese outpost jumped 5.6 percent in June, up from 5.2 percent in May, reaching a three-year high. The prices of many items such as tobacco, pork and alcoholic drinks have consistently tested new heights over the past year.
One reason behind the constant jump in the price of essentials is China. Hong Kong depends overwhelmingly on imports for its food needs, bringing in almost 90 percent of its food stuff in 2010, with the bulk coming from China. However, now China itself is struggling to put a lid on the price of essentials like meat and food grains. With this, the rise in the price of essentials in China is spilling over to Hong Kong.
Still other reasons for inflation in Hong Kong are home-made. Property prices and consequently rents in Hong Kong have marched northwards, with prices jumping yet again in June. Since January 2009, property prices in Hong Kong have skyrocketed 70 percent. With the supply of new housing hard to come by, Hong Kong has become one of the most expensive cities in the world. According to CB Richard Ellis Group, a property broker, it was the most expensive location for businesses as well. All these factors are converging to entrench inflation in Hong Kong. Even some of Hong Kong’s officials believe that inflation will go up before coming down. Hong Kong’s Financial Secretary John Tsang even opined that prices could continue to rise until the end of 2011.
Meanwhile, mass-market houses, which could help ease inflation, continue to be in tight supply. In fact, there are so few low-cost homes available that their sales are projected to fall in 2011. On the other hand, economists in the region expect steadily climbing mortgage rates to trigger a 30 percent drop in property values by 2013. Still, to provide immediate succor to a majority of Hong Kong’s population who earn less than HK$20,000, the government is planning to make a new supply of land available. Currently, just 7 percent of Hong Kong’s land mass is apportioned for residential use, with woodlands, grasslands and marshy areas constituting nearly 70 percent.
Singapore: Red-hot economy experiences a temporary blip
Singapore’s red-hot economy lost some steam during the June quarter of this year. The city-state’s GDP for the second quarter contracted almost 7.8 percent compared to the first quarter, during which time it grew a whopping 27.2 percent. Year-over-year second quarter growth came at a modest 0.5 percent, less than the 1.1 percent increase predicted by a group of economists surveyed by Dow Jones.
Singapore’s drop in GDP for the second quarter has largely been attributed to a slump in the electronics sector, which has faced challenges due to problems with the supply-chain in Japan since the beginning of the second quarter. Further, trade with Europe and the U.S., some of Singapore’s largest trading partners, has also suffered due to uncertainties surrounding Greece’s debt and a slower-than expected job market recovery in the U.S. Consequently, exports to the U.S. declined nearly 6.3 percent and exports to European Union inched up just 1.3 percent.
The fall in trade activity, however, was offset by strong growth within Asia. Trade with India in particular has increased impressively following a free trade pact between the two countries in 2010. Singapore’s exports to China and South Korea also increased during the quarter.
Although the second-quarter fall in output was quite dramatic, few economists and policy makers are worried about the situation. Economists from private firms such as Credit Suisse and Action Economics said that the current dip in GDP is temporary and the blip will be followed by robust recovery as Japan’s supply-chain mends itself.
But the main thing that worries Singapore is inflation. Singapore’s Monetary Authority has raised its inflation forecast for the full year 2011 and now expects inflation to range between 4-5 percent above its initial forecast of 3-4 percent. The country, which uses its currency rather than interest rates to conduct monetary policy, has let its currency appreciate steadily since last April. Although the strengthened currency has alleviated the burden of higher oil and food prices and has reined in some of the overheated industries, it has done little to control labor costs and property prices. Both these factors are expected to weigh heavily on the country’s growth for the rest of the year. The island’s government now expects growth to be closer to the lower end of its forecast of 5-7 percent.
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