Emerging Asia Pacific witnesses a modest rebound despite oil spike

 

Emerging Asia Pacific economies, which reported dismal economic numbers during the fourth quarter of 2011, recovered some lost ground during the first quarter of 2012. Export-led growth in many Asian countries such as Taiwan, Malaysia, South Korea, and China, which had come under pressure during the last months of 2011, witnessed slight improvements in 2012 thanks to receding fears about a sovereign debt crisis in the European Union and a stronger-than-expected recovery in the U.S. China, the region’s largest economy, however, signaled that it will accept a slightly lower growth rate of around 7.5 percent over the coming years. The Chinese economy grew at a pace of nearly 10 percent for over two decades.

Inflationary pressures in the region also remained subdued in many of these economies in the face of slowing growth. However, there were significant signs that inflation could haunt emerging Asia Pacific economies sooner than later. A spike in oil prices during the first quarter of 2012 stirred inflation in many economies although the pace of inflation was not as high as witnessed during mid-2011. Consequently, although many countries experienced relatively low inflation, some central banks in the region stubbornly refused to cut interest rates. Central banks in Malaysia, India, and South Korea held on to their current levels of interest rates over fears of igniting inflationary pressures. On the other hand, central banks in Indonesia, Thailand, and Philippines were more comfortable cutting interest rates to stimulate growth.

At a Glance

 

• China: Chinese exports slowed during February resulting in a $31.5 billion trade deficit, the largest deficit since 1989. China’s annual GDP growth slowed to 9.2 percent in 2011 from 10.4 percent in 2010.
• India: The Purchasing Manager’s Index measured by HSBC fell for the second straight month to 54.7 in March from 56.6 in February and 57.5 in January.
• South Korea: Industrial output inched up just 0.8 percent in February compared to nearly a 3.2 percent jump in January, according to Statistics Korea.
• Indonesia: Indonesia’s central bank expects growth for the fiscal year 2012 to slow to 6.3 percent compared to 6.5 percent during 2011.
• Taiwan:  Taiwan pushed its consumer price inflation forecast to 1.46 percent and pared its GDP target to 3.85 percent for 2012.

 

China: Monetary tightening takes a toll on output

China started calendar year 2012 on a sober note. Economic growth in the world’s second largest economy came under pressure from a stringent monetary policy, weakened exports, and subdued housing markets. Consequently, China had a forgettable January and February in 2012, recording the weakest production gain figures since 2009. During this period, the slowdown in the European Union, one of China’s largest export markets, hit many of the coastal factories that predominantly cater to overseas demand. As a result, Chinese exports slowed, forcing the country to record a $31.5 billion trade deficit in February. The February trade deficit was the first deficit in the past 12 months and the largest monthly deficit since 1989.

The slowing export industry also pulled down industrial production growth to 11.4 percent for the first two months. Other economic indicators such as retail sales growth slowed to 14.7 percent in February against an expected 17.6 percent growth estimated by economists surveyed by Bloomberg.

Nonetheless, Chinese rulers seemed to take the slowing growth in stride. In early March, Chinese Premier Wen Jiabao pared the nation’s targeted annual growth rate to 7.5 percent from the 8 percent annual growth target set in 2005. In 2011, China’s annual GDP growth rate touched 9.2 percent compared to 10.4 percent in 2010. China’s GDP growth rate slowed primarily due to a tight monetary policy that was introduced to combat stubbornly high inflation. China’s consumer price inflation, which had climbed as high as 6.5 percent in July 2011 slowed to an average of 5.4 percent for the whole year primarily due to monetary tightening.

But the monetary tightening had other effects as well. China’s consumption-led growth became a victim to high interest rates. Sales of passenger cars, including both small cars and SUVs, declined 4.4 percent during the first two months of 2012. The industrial and manufacturing segment also witnessed a slowdown. For instance, the purchasing manager’s index (PMI) compiled by HSBC Holdings Plc, fell to 53.3 in March from 53.9 in February.

On the other hand inflation, which was subdued, also gained pace in March. Consumer price inflation in China jumped 3.6 percent during the month. Although inflation during March was quite below China’s targeted inflation of 4 percent, food price inflation at 7.5 percent has caused concerns. Further, a sharp spike in oil prices earlier this year also forced Chinese authorities to keep a close watch on inflation numbers. Home prices in China, meanwhile, slipped down from their peak in 2010. Prices of new apartments fell in 45 of the 70 cities surveyed by the government in February. The fall in home prices come after a protracted battle from Chinese authorities to prevent a housing bubble in the country. Zhang Xiaoqiang, the vice chairman of National Development and Reform Commission, said that China’s first quarter GDP grew 8.4 percent citing preliminary research figures.

India: Slowing investment and persistent inflation cloud outlook

India’s GDP for the three months ended December 2011 grew at 6.1 percent, the slowest pace in nearly eight quarters. The slowdown in GDP comes amidst the backdrop of high inflation, slowing investments, and faltering demand from developed markets. During this period, almost all legs of the economy encountered substantial challenges. While manufacturing output inched up just 0.4 percent, mining and farm output declined substantially. A large fiscal deficit arising from high social sector spending and a spike in oil prices has been troubling India over the past year. Private economists surveyed by Bloomberg estimate that India’s fiscal deficit will touch 6.1 percent of GDP for the year ending March 2012.

On the other hand, the pace of investment is slowing in Asia’s third largest economy. The investment-to-GDP ratio in the December quarter fell to 30 percent from nearly 34 percent in the year-ago period. Gross fixed capital formation, which measures investments in roads and factories, declined 1.2 percent in the December 2011 quarter following a 4 percent fall in the previous quarter.

Rising government borrowing coupled with low private investment and high oil prices have been fanning inflation in the country. Inflation during most months of 2011 remained persistently above the 9 percent level, although it has eased a bit in recent months. In an attempt to pare borrowing costs for the private sector, India’s government is planning to reduce its fiscal deficit to 5.1 percent of GDP for the year ending March 2013. It will be a second consecutive year in which India’s fiscal deficit would exceed 5 percent.

India’s central bank, meanwhile, is watching the inflation numbers in order to trim borrowing costs to boost growth. The central bank had raised interest rates by nearly 375 basis points since March 2010 to combat inflation. During its policy meetings in 2012, the central bank refrained from cutting rates but chose to reduce the cash reserve ratio. India’s inflation, which trended down a bit in late 2011 again showed signs of rising in February, during which month it jumped 6.95 percent.

In another note of weakness for India, the Purchasing Manager’s Index measured by HSBC, has consistently fallen over the past three months. After falling to 56.6 in February from 57.5 in January, the reading fell to a low of 54.7 in March. HSBC reported that the dip in the figures was largely due to domestic factors like high input costs and supply side constraints like overcrowded ports and roads. India is currently facing a shortfall of nearly 114 million metric tons of coal required to produce electricity and keep its factories running.

South Korea: Investments bring cheer even as exports slow

South Korea’s export-dependent economy is facing a slowdown. Although overall economic output exceeded expectations in January, output growth during February decelerated substantially. Industrial output inched up just 0.8 percent in February compared to nearly a 3.2 percent jump in January according to Statistics Korea. Production in a number of industries such as telecommunications, non-metallic minerals, and heavy engineering electrical goods came under pressure during the month.

The various arms of the economy, such as exports, consumption, and investment also recorded a fall. Exports, which declined 2.7 percent during the fourth quarter of 2011, continued to fall in the first quarter of 2012 as well. Hit by a worries over the sovereign debt crisis in Europe, South Korea’s exports fell 1.4 percent in March. Corporate investment and private consumption also slipped 4.3 percent and 0.2 percent respectively, during the fourth quarter ended December 2011.

Meanwhile, inflation in the country has fallen in tandem with growth figures. South Korea’s consumer price inflation hit a 20-month low of 2.6 percent in March. Nonetheless, the country’s central bank, Bank of Korea, kept its benchmark interest rates unchanged at 3.25 percent during its latest policy meeting in March 2012. The central bank is largely worried about a 1.9 percent jump in core inflation, which excludes prices of oil and food. Despite a fall in consumer price inflation, South Korea’s government still hasn’t changed its projection of a 3.2 percent jump in inflation for the year, partly due to an anticipated spike in oil prices.

Nonetheless, South Korea was reportedly unperturbed by the bad economic news emerging from across the globe. The country’s finance minister Bahk Jae Wan said that the nation’s economy likely bottomed out during the first three months of 2012. Adding to the cheer, Moodys, a credit ratings firm, raised South Korea’s credit rating outlook to positive from stable citing ‘strong and improving fundamentals’. South Korea also recorded a robust 17 percent gain in foreign direct investment for the first quarter of 2012.

Indonesia: Rate cuts from central bank spur growth

Worried over a slowing economy, Indonesia started cutting interest rates zealously in mid-2011. But after two interest rate cuts, the archipelago pushed the pause button on interest rates in late 2011. Nonetheless, inflation continued to fall in Indonesia during the initial months of 2012 as well. Inflation during January fell for the fifth continuous month to 3.65 percent, closer to the lower level of the central bank’s target range of 3.5 percent to 5.5 percent. Consequently, Bank Indonesia, pared interest rates by another 25 basis points to 5.75 percent in February. Falling interest rates in Indonesia helped keep consumption-led growth intact in the country.

However, despite the fall in consumer price inflation, core inflation, which measures inflation arising from structural costs like labor is now a concern.  Indonesia’s core inflation has been around 4.31 percent since the beginning of the year. Furthermore, inflation expectations have climbed up in Indonesia during recent months over an anticipated oil price hike. These factors prompted the central bank to hold interest rates during its March policy meeting. 

In other developments, the pace of lending, especially that of syndicated loans, has slowed considerably since the midpoint of 2011. Lending by banks has actually declined since the central bank imposed stringent measures to control the amount of foreign capital entering the country in early 2011.

Indonesia’s central bank now anticipates growth for the fiscal year 2012 to slow to 6.3 percent compared to 6.5 percent during 2011. The central bank also expects inflation to range between 6 percent and 7 percent in 2012. 

Thailand: Recovering from once-in-a-century flooding

After a disastrous year in 2011, Thailand‘s economy started showing more signs of recovery since the beginning of 2012. A once-in-a-century flood in mid 2011, which killed more than 700 people, also wreaked havoc among Thailand’s export industries. Hundreds of factories involved in the auto and computer hardware industries were left submerged for close to a month during the floods. Further troubles from global demand in the face of the European sovereign debt crisis also intensified trouble for Thailand’s economy. Consequently, Thailand’s GDP contracted nearly 9 percent in 2011, its worst ever recession since the Asian Financial Crisis of 1997.

The country’s central bank responded with two quick interest rate cuts to deal with the floods and stimulate demand by lowering borrowing costs. Aided by these efforts and a slight improvement in the global markets, Thailand’s economy recovered during the initial months of 2012. A number of factories that were closed due to the floods began production. The industrial production index slipped at a much slower pace of 15.5 percent in January 2012 compared to the 25 percent plunge witnessed in December 2011. With more factories ramping up operations, capacity utilization rose 58.4 percent in January from 51.4 percent in December. Large factories belonging to Western Digital, a hard-disk manufacturer and Honda, a Japanese automaker started production.

This momentum spilled over to Thailand’s export industries as well. Exports that shrank 6 percent in January posted 10.3 percent growth in February. The country now expects a trade surplus of nearly $7.3 billion for 2012.

The Bank of Thailand, the country’s central bank, kept its interest rates unchanged at 3 percent during its March policy meeting. However, Thailand’s finance ministry opined that the central bank could raise interest rates to 3.25 percent towards the end of 2012 in the event of oil prices shooting up. The country’s finance ministry also revised its forecast for GDP to grow between 5 percent and 6 percent from its earlier prediction of 4.9 percent.

Philippines: Rising deficit poses challenges to infrastructure spending

Faced with slowing growth and inflation, the Philippines’s central bank started cutting interest rates in 2012. During its policy meeting in March, the Philippine central bank cut interest rates for the second straight meeting by 25 basis points.

Lower inflation has been helping the central bank in reducing interest rates. Inflation slowed to 2.7 percent in February, a two-year low figure. The central bank, however, indicated that it will rather hold interest rates at their current levels of 4 percent before further cuts. The Philippines imports all its oil needs and a sharp jump in the price of oil during the first quarter of 2012 has given rise to fears of the return of inflation.

The reduced borrowing costs are largely expected to spur spending in Philippine public infrastructure projects. Government spending, in particular, is predicted to get a boost according to economists surveyed by Bloomberg. The country’s president Benigno Aquino has unveiled plans to increase government spending by nearly $16 billion to build a massive transportation network including railways, airport terminals, and educational institutions.

Nonetheless, the rising budget deficit in the country could pose challenges to the government’s infrastructure spending initiatives. For the year ending December 2011, the Philippine budget shortfall touched a multiyear high of $2.5 billion. Despite ballooning deficits, a World Bank report said that the Philippines is benefiting from strong macroeconomic fundamentals, political stability and a popular government.

Malaysia: Central bank sees pressure on growth despite an early rebound

After a lull during the last quarter of 2011, Malaysia’s economy rebounded strongly since the beginning of the year, thanks to improved investment and export growth. Both the industrial production figure and export growth for February showed substantially enhanced economic conditions compared to the pessimistic months in 2011.

Figures published by Statistics Malaysia indicated that the overall industrial production index for the country improved 7.5 percent in 2011 over 2010, surpassing expectations of the 5 percent growth estimated by economists surveyed by Bloomberg. The January industrial production figures too were revised upwards by 0.3 percent. On the other hand, exports, one of the main drivers of Malaysia’s economy, surged 14.5 percent in February much higher than the consensus estimates of 8 percent predicted by economists surveyed by Bloomberg. Malaysia’s manufacturing output was largely buoyed by a spike in the production of consumer staples such as food, beverages, and tobacco. Other traditional export industries, such as television and communication equipment along with higher production of petroleum and rubber, also helped raise manufacturing output.

But despite higher output, Malaysia sees a mild slowdown in GDP growth for 2012. Even though the country’s finance ministry expects GDP to grow between 5 percent and 6 percent for 2012, the central bank’s estimates were more conservative, with the GDP growth forecast ranging between 4 percent and 5 percent. The central bank also added that inflation in the country is expected to hover between 2.5 percent and 3 percent in 2012, down from 3.2 percent experienced in 2011.

Despite a lower inflation forecast, Malaysia’s central bank has stubbornly held to its current interest rate of 3 percent for the past five policy meetings since mid 2011. This is in contrast to other central banks in the region like Indonesia and Thailand that cut interest rates aggressively to counter the effects of slowing growth.

Taiwan: Inflation fears simmer even as the export-powered economy slows

Like most other export-dependent economies in Asia, Taiwan started 2012 on a weak note. The country reported that its GDP growth figures for the fourth quarter of 2011 came at just 1.9 percent, the slowest pace of quarterly growth in nearly two years. The GDP growth was much less than the one witnessed during the third quarter of 2011. Technically, this pushed Taiwan into a recession. However, for the entire 2011 year, Taiwan managed to grow at 4.03 percent. Exports, which single-handedly contribute to nearly 65 percent of the country’s GDP, came under pressure due to a slump in demand from the European Union. Exports during December 2011 grew at the slowest pace in nearly 26 months.

Export woes also spilled over to the country’s labor markets during early 2012. According to a report from Taiwan’s Council of Labor Affairs, as many as 91 companies reached agreements with nearly 11,600 workers to take leave without pay. There was no respite for Taiwan in the month of January in 2012 either. Factory output during January declined almost 16 percent and export orders fell 8.6 percent.

But Taiwan’s economy picked up some much-needed momentum in February thanks to improved liquidity conditions in the European Union and a resurgent U.S. Taiwan’s export orders improved in February as demand from a variety of sectors such as electronics rose. Export orders, an indication of shipments over the following three months, jumped nearly 17.6 percent in February.

Meanwhile, despite some signs of slowing in the economy, Taiwan’s central bank held interest rates intact. Although there were some expectations of an interest rate cut from the central bank, a jump in oil prices has prompted Taiwan’s central bank to hold rates steady. In early April, Taiwan’s government decided to hike petrol prices by an average of 10.7 percent to ease the burden on state-owned oil companies. This, along with an anticipated raise in electricity and gas prices, is largely expected to stir inflation. Consequently, the central bank left its benchmark interest rate of 1.875 percent unchanged during the March policy meeting and said it is focused on cutting inflation. Taiwan recently pushed its consumer price inflation forecast to 1.46 percent and pared its GDP target to 3.85 percent from the earlier prediction of 4.2 percent.

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FORWARD LOOKING STATEMENTS

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