International | Jul 01 2009
By Chris Shaw
Developments in emerging Asian economies so far this year have gone pretty much according to the forecasts of ANZ Bank. Paul Gruenwald, chief economist Asia at the bank notes, while China and India continue to set the pace for growth in the region, the GDP growth split between the newly industrialised economies (NIEs) and the ASEAN nations remains.
Gruenwald also points out most of the new growth momentum has come from either the NIEs or as a result of fiscal stimulus plans, though the overall level of economic activity remains well below that of the September quarter last year when the global financial crisis really hit the region.
Given Asia was not able to decouple from the rest of the world in terms of growth, Gruenwald suggests so-called economic “green shoots” will take time to develop, so what is needed in the meantime is growth from domestic sources such as via an increase in discretionary spending and as a flow through effect from fiscal stimulus measures.
Looking at the region over the past six months, Gruenwald notes the downturn has not been simply an export led slowdown but has been broadly based as investment has also fallen on the back of lower levels of construction activity and inventory draw-downs.
The NIEs such as Hong Kong, Korea, Taiwan and Singapore have been the hardest hit. This is no great surprise in Gruenwald’s view given these are the most export dependent nations in the region. For the half year GDP among NIEs fell 8.5% year-on-year, split equally between investment on one side and consumption and exports on the other.
In comparison, growth for ASEAN nations fell by just 2.5%, though this hides some significant differences in performance among various countries as both China and India have done relatively well when compared to others in the group such as Thailand and Malaysia.
Looking forward Gruenwald suggests as China’s stimulus package has had only a minor benefit for growth in the rest of the region, it is clear that nation won’t be able to simply drag the rest of the region forward as beneficiaries of the Chinese stimulus package have been the countries exporting base metals to China rather than trade parners in the rest of Asia.
What also complicates the outlook for the region in Gruenwald’s view, is the split between soft and hard economic data as the former, which includes survey results and sentiment indicators, have been improving to a greater extent than the latter, which are based on factors like actual flows of goods.
Gruenwald expects the most likely outcome will be a weakening in the soft data to converge with the hard numbers, as with the European and US economies still weak, a significant improvement in measures such as exports remains unlikely in the shorter-term. The other point is much of the economic data are not improving but simply slowing in rate of decline. This supports the view a quick turnaround in the region seems unlikely.
This leads Gruenwald to suggest the shape of any economic recovery in Asia will to some extent still depend on how the US and European economies perform. This tends to suggest neither an “L” shaped or “V” shaped recovery is to be expected.
This leaves “W” or “U” shaped recoveries as the alternatives and Gruenwald leans towards the latter as for a “W” to emerge there has to first be a recovery before a subsequent weakening and the data in Asia to date have only shown a reduced rate of decline rather than any solid improvement.
One factor that will aid in any recovery when it comes, according to Gruenwald, is the supply side of the economic equation remains in relatively good health as firms throughout Asia have done a solid job in terms of managing inventories, while the banks appear to be well capitalised and so should be able to continue lending as demand for credit recovers.
Using current domestic demand momentum, an assessment of the effectiveness of stimulus packages in creating new demand, the base effects of the sharp drop in activity levels in the past six months or so and the pace of external demand growth as guides, Gruenwald has attempted to put together growth forecasts for the region and his numbers suggest emerging Asian GDP growth of 2.9% this year, rising to 6.5% in 2010.
The big two of China and India lead the way with growth this year forecast at 7.1% and 4.9% respectively, increasing to 8.3% and 6.6% respectively in 2010. Ex China and India he expects growth in the region this year of minus 1.8% before a recovery to 3.7% growth in 2010.
Looking at each country specifically, Gruenwals is forecasting GDP growth of 7.0% for China this year, with risk to this number to the upside in his view. India will almost match this with growth of 6.5%, while Hong Kong is expected to be one of the poorer performers in generating growth of negative 6.75%.
Korea’s economy is also expected to contract to the tune of about 3.0% this year, while Taiwan is forecast to report negative growth of 5.25% and Singapore is expected to be the absolute struggler on the bank’s numbers in delivering negative GDP growth of 7.5%.
Among the ASEAN economies, Gruenwald expects Indonesia to post growth of 4.0% compared to 0.5% growth in the Philippines, both better than Malaysia’s expected minus 2.0% and Thailand at a forecast minus 3.0%. Vietnam should be one of the better performers and deliver growth of around 4.5% in Gruenwald’s view.
Key factors to watch for in his view are signs of stabilisation in US house prices, a peaking of unemployment among the G7 nations and a resumption of normal bank lending as all will contribute to improved demand for Asian exports. Such a recovery will take time however, as restoring demand to former levels given the scope of the current downturn cannot be achived by any quick policy fixes.