International | Oct 19 2012
– Asia remains the solid growth driver
– China's slowdown should not be feared
– Foreign imports from Asia will nevertheless remain subdued
By Eva Brocklehurst
Take a deep breath and then ask the dreaded question. DBS Bank did. Where oh where is growth going to come from in 2013? DBS Group Research has surveyed the proposition, looking at the economies that once led the world, and found the answer lies in the place it's been for the last four years – Asia. That's because Europe is mired in recession and the US economy is going sideways, as is Japan's. However, the analysts at DBS go one step further and confront the commonly held view that struggling mature economies will set Asian growth back, through lack of demand for its goods and services, and we'll all get bogged.
G3 (US, Europe and Japan) output has fallen over the past four years to be 2% less than a year ago. Meanwhile, Asia (ex-Japan) has continued to grow and on this DBS rests its case. Asia will grow without Europe and the US. Today Asian output is nearly 32% higher than it was four years ago — right through the biggest financial / economic crisis we've ever known. The analysts paint a nice picture as a comparison, noting that Asia's economy grew by the size of Germany's over that 4-year period. To put it another way, every 3.5 years Asia adds Germany to its economy.
Moreover, we in this part of the world should not worry about slowing growth in China. This is the fear in the back of every Australian's mind – we will lose our prosperity if China is not going gangbusters. What we need to understand is, China is still – growing. Yes, it has slowed, but it's not a giant bubble bursting. That slowdown has not simply been the inability of Europe or the US to buy all China's goods, DBS maintains. The slowdown in trade, whether China or Asia overall, came back in early 2011 and was intentional. The analysts say a good deal of the reason why China’s GDP growth is running at 7.5% instead of 9.5% is that investment growth has slowed considerably in 2012.
Since 2005, fixed asset investment growth has averaged 26% per year in China. In 2009, it ran 5 percentage points above average to counter the global financial crisis. Today, it is running 6 percentage points (30%) below average, according to the survey. A large percentage of that investment was in construction and property projects. Why is this important? Investment accounts for 50% of China's GDP. It's intentional, DBS says, because China wants to encourage more consumption-related growth and is trying to structurally achieve that. Right now, officialdom is not worried about a 2% drop-off in growth, when it was happening at such a rate that the economy was in danger of being overbuilt. Fair enough, Europe isn’t helping, but a drop in China's investment growth is carrying the can. A country's growth rate must slow as incomes rise – that's a basic tenet – and there is a lot of ground to make up in China. DBS notes China’s income levels are still one-tenth those of Singapore, and if the latter can grow at 5% sustainably (Its growth has averaged 6.3% over the past decade) then 8.5%-9.0% seems eminently possible for China.
There's another misconception DBS is eager to discard: US and European central banks pump money into the economy which then rushes over to Asia, where growth and returns are higher. The fact is, most (80% or more according to the analysis) of the money the US Fed has injected into the economy has stayed at the Fed in the form of excess reserves. Here's the rub, banks have been unwilling to put the money to work in the economy, which is why QE1 and QE2 haven’t had much effect and why the Fed has resorted to QE3. In DBS' book the same is true of the European Central Bank. The ECB has intentionally sterilised its injections, withdrawing as much from the system as it put in via bond purchases. In both cases, if the money doesn’t go out into the broader economy, it can’t come rushing over to Asia the next day from the sale of goods.
So, what's put off those that have money to invest in Asia this time? Surely, there is still some loose change out there looking for a good return. It's risk aversion. The reason inflows dried up in August 2011 is that investors began to fear a dismantling of the eurozone and took risk off the table, DBS maintains. Unless that risk is removed, inflows are unlikely to return in a big way. The ECB efforts will not solve the eurozone's problems, according to the analysis. These are enmeshed in the competitive differentials between the core (Germany, France) and the periphery (Greece, Spain). The quantitative easings have simply bought time for restructuring and whether governments take advantage of this remains to be seen. However, this does mean large capital flows aren't heading Asia's way from traditional sources for some time.
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