International | Feb 13 2009
By Chris Shaw
The US may be the most obvious example of a proactive government attempting to deal with the global financial crisis given its array of stimulus packages and monetary policy measures, but as Standard Chartered notes policymakers in Asian nations have also been taking a variety of measures to counter the impact of the global economic downturn.
China’s huge stimulus package leads the way in dollar terms but nations such as Singapore, India and Malaysia have taken similar steps to boost economic activity by committing money to infrastructure projects as well as tax cuts and social programs.
The problem for the region in Standard Chartered’s view, is these measures will take some time to have an impact, while the extent of the global downturn means the programs proposed to date are unlikely to prove to be enough and further action will be required.
This, along with the fact the slowdown in economic activity has seen export growth in the region turn significantly lower, suggests higher domestic demand will be required to maintain the region’s growth momentum. This is easier said than done though in the group’s view, as while such an environment calls for consumers to save less and spend more the combination of an uncertain employment outlook and falling asset values makes this combination of actions less appealing. Recent data support this view, as for example retail sales in January in China grew by 13.8% in year-on-year terms, down from 19% growth in December.
It is a similar story for businesses in the region as the weaker economic environment means companies are concentrating on staying in business rather than expanding. As such companies are cutting back on planned investment spending. Combining these factors sees Standard Chartered suggest economic performance in the region in the first half of this year remains challenging, especially given the collapse in external demand for which little can be done.
To put this decline in exports into perspective the group notes in year-on-year terms exports were down 11.9% in December and have fallen further in January, with China’s exports down 17.5% last month, Korea’s falling 32.8% and Vietnam’s down by 24% on a year-on-year basis. This trend is expected to continue for at least another 9-12 months in the group’s view.
At the same time unemployment is creeping higher throughout the region and Standard Chartered expects this to also accelerate in coming months, particularly as the end of the Lunar New Year period may mean another round of factory closures.
Enter governments in the region, Standard Chartered noting they have done their part by being aggressive in cutting interest rates with policy rates coming down in moves of least 50-basis points in most cases and by as much as 150-basis points in the case of Vietnam. More rate cuts are anticipated, with the group expecting many economies in the region will see rates hit all-time lows by the time the easings in policy are finished.
The key will be ensuring this easing is transmitted to borrowers, as if banks don’t match policy and reduce rates on lending to customers there may be a decline in borrowing appetite and this won’t help the attempts to boost domestic demand.
This explains why fiscal policy initiatives are also being announced, with spending on infrastructure the most popular measure being introduced. At the same time tax cuts and cash rebates to households are having a more immediate impact in boosting domestic consumption, as was shown by the boost to retail activity in Australia following the Rudd Government’s first handout to households towards the end of last year.
Looking ahead Standard Chartered notes the combination of measures are not without risk, as inflation could again raise its head and threaten low interest rate policies while higher energy prices could pressure the finances of those governments with fuel subsidies in place and consumer budgets elsewhere.
Overall the group has been encouraged by the policy measures introduced to date through the Asian region but expects more will be needed. Standard Chartered believes maintaining economic growth this year is impossible, but maintaining social order and financial stability can be achieved and this is regarded just as important a policy goal in the current environment.