Q1 2012 Economic Review

7/31/2019 Q1 2012 Economic Review

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February 2012

Asia PacifcEconomicOutlook

In thIs Issue:

ChinaJapanMalaysiaTaiwanVietnam



Asia Pacifc Economic Outlook — February 2012 2

China’s economy seems headedor a sot landing.

In the ourth quarter o 2011, real GDP was up 8.9 percent

over the previous year. This was the slowest rate o growthsince 2008, but it was relatively strong nonetheless. Further

news in January showed an economy growing but at a

more modest pace than beore. During the Lunar New

Year holiday in January, retail sales were up 16 percent over

the previous year. This compares to growth o 19 percent

during the Lunar New Year o 2011. The January 2012

gure was the slowest rate since 2009. The government’s

purchasing manager’s index or manuacturing was up

slightly in January, refecting a slight and modestly paced

acceleration in manuacturing output. Finally, price

pressures have diminished. In December, consumer price

infation was 4.1 percent, down rom above 6 percent

during the summer. This was the lowest rate o infation in

15 months. It refects the impact o last year’s tightening o

monetary policy. It also refects the eects o dampening

global commodity prices.

Remaining imbalances

Despite the slowdown in growth, there remain some

imbalances in the economy. In the ourth quarter,

investment in xed assets was up 23.9 percent. This

means that investment continued to expand as a share

o GDP and accounted or a disproportionate share o

the increase in GDP. It refects ongoing local government

spending on inrastructure and continued spending by

state-run companies on expanding capacity. It also refects

a continued rise in property development.

There are, however, indications that property investment

is starting to diminish. In December, home sales were up

only 10 percent, the slowest rate o increase since 2008.

In addition, home prices were down 6.9 percent over the

previous year, refecting tighter credit cond itions in the

housing market.

In any event, it is not possible or investment to sustain

economic growth in the long term. Property investment

is already decelerating, and it is likely that other orms o

investment will likely decelerate in the near uture. Instead,there may be a to boost consumer spending. It would also

help i there were a boost to investment by private sector

companies, especially smaller businesses. Consequently, the

government has introduced incentives or bank lending to

small businesses. It has also authorized banks to increase

their overall lending, including lending to consumers.

Although monetary policy has been loosened in recent

months, the central bank has chosen to keep interest rates

and the required reserve ratio unchanged during its most

China




recent deliberations. The government appears to be in a

wait-and-see mode, not wanting to curtail growth but still

wanting to curtail infation. In addition, the government

remains interested in a gradual bursting o the property

price bubble. House prices have allen, but some ocials

have said that a urther decline in property prices would

be benecial, enabling more households to aord a home

purchase.

Currency issues

One o the more interesting pieces o economic data lately

was the decline in oreign currency reserves in the ourth

quarter o 2011. This was a surprise and was the rst time

since 1998 that reserves declined. The decline was small

— a drop o $3 billion out o a total o over $3 trillion

in reserves. Still, it was signicant. For the past decade,

China has accumulated reserves in order to prevent the

currency rom rising in value. Rather than allowing currency

appreciation, the central bank met the excess demand

or renminbi by supplying that renminbi to the market.

In exchange or supplying renminbi, China purchased

oreign currency. Yet, in the ourth quarter o 2011, China

accumulated no oreign currency, and still, the renminbi

did not appreciate. That means that there was no excess

demand or renminbi. It means there was no fow o “hot”

money into China. Indeed, there was an outfow o capital.

One o the problems with accumulating oreign reserves

is that, in the process, China has been boosting its moneysupply. Thus, the ocus on maintaining the exchange

rate has interered with China’s ability to manage its own

money supply and control infation. Now, with the currency

stabilizing, even in the absence o currency market

intervention, China can ocus on domestic considerations

and leave the currency alone. Still, over time, it is likely

that the renminbi will appreciate urther in the absence o

intervention. That would be a good thing in the long run as

it would suppress infation and boost Chinese purchasing

power. It would also help to acilitate a transition away

rom export orientation.

External headwinds

Finally, China remains concerned about Europe. The

leadership has indicated a willingness to participate in

eorts to stabilize Europe’s nancial system, probably

through the IMF. The decline in European demand already

had a negative impact on China’s export growth. The

IMF issued a warning that, should Europe sink into a

deep recession, China’s economic growth could drop

by 4 percentage points. That would be catastrophic.

Conventional wisdom holds that China needs to grow at

least 7–8 percent per year in order to absorb new entrants

and migrants into the labor orce. For now, a deeper

recession in Europe — possibly the result o a collapse o

the Eurozone — seems unlikely. But such a scenario cannot

be ruled out. The IMF also said that, should China ace a

serious decline in growth, a big scal stimulus would be

warranted.

The IMF issued a warning that, should Europe

sink into a deep recession, China’s economicgrowth could drop by 4 percentage points.That would be catastrophic.




Japan experienced a troublingdearth o positive news in 2011.

In the rst quarter, a devastating earthquake and tsunami

resulted in widespread destruction in the northeastern parto the country. Natural disaster was promptly ollowed by

the threat o a nuclear d isaster, which resulted in industry

shut downs, supply chain disruptions, and plummeting

manuacturing output. The Japanese economy contracted

during the rst hal o the year, but by the end o Q3 2011,

it staged a remarkable but short-lived recovery beore

showing signs o a slowdown in the ourth quarter. Weak

exports, an unavorable job market scenario, and supply

chain disruptions resulting rom foods in Thailand were a

drag on GDP growth in Q4 2011.

The Eurozone crisis and the resulting repercussions on the

world economy remain signicant risks or the Japanese

economy. Moreover, the outlook or the U.S. economy

isn’t very strong either. These external actors, combined

with the yen’s relentless appreciation, may take a heavy

toll on Japan’s export-dependent economy. Although

an uptick in retail sales partially compensated or lower

exports in December 2011, retail sales are unlikely to

drive GDP growth in the coming months. As employment

benets expire, Japan’s labor market may also experience

higher levels o unemployment and wage loss. As a result,

domestic demand may be s luggish throughout the year.

A major problem that plagues the Japanese economy

is the rise o the yen, the consequences o which have

been several-old. First, the appreciating yen has directly

impacted Japan’s export competitiveness. Exports declined

during Q4 2011, and this downward trend is likely to

persist in 2012. Owing to declining exports and rising

uel imports, Japan is expected to run a trade decit in

2011 or the rst time since 1980. Second, the decline in

exports has a huge impact on Japan’s economy and, in

particular, the manuacturing sector. Finally, a rising yen

accentuates Japan’s defationary environment. Japan’s

core CPI recorded a 0.1 percent decline in December 2011

ater declining 0.2 percent in November and 0.1 percent in

October. While mild infation may help revive the Japaneseeconomy, whether the CPI will experience an uptick in

the near uture remains uncertain. Furthermore, given the

current state o the U.S. economy and the weak outlook

or Europe, the yen is likely to continue on its upward path

against the dollar and the euro.

Meanwhile, the initiation o the Trans Pacic Partnership

(TPP) between the United States, Australia, South Korea

Japan




and other countries in Southeast Asia may be a bitter but

helpul pill or Japan. The TPP has the potential to liberalizetrade and bolster relations between member countries.

However, Japan’s interest in joining the group drew mixed

reactions domestically. Several industries within Japan

are wary o losing protection against oreign competition

and will likely lobby against Japan’s membership. The

U.S. auto industry has also expressed its concern in

allowing Japan to join the TPP, citing structural barriers in

Japan’s economy that cannot be corrected through trade

agreements. In their view, Japan’s membership will hurt

the U.S. manuacturing sector.1 On the other hand, various

businesses both within Japan and outside have welcomed

the decision. While the move could benet the Japanese

economy, the Prime Minister will likely ace severalchallenges in obtaining parliamentary approvals.

On the upside, it’s possible that reconstruction activity

could keep the economy afoat in 2012. Furthermore,

Japan’s auto sector output is likely to accelerate. According

to a poll conducted by Reuters, many analysts anticipate

that the impact o reconstruction spending will wane as

the year progresses. However, China’s economy is expected

to recover during the latter part o the year and mayprovide some support to the Japanese economy. Overall,

growth expectations or 2012 are muted compared to

initial orecasts.

So ar, Japan’s recovery isn’t living up to expectations.

Moreover, excessive reliance on exports does not augur

well or the country’s economy. Inherent weaknesses in the

global economy could potentially have negative eects on

Japan’s export and nancial sectors. The situation could

turn or the worse i the external environment continues to

deteriorate.

While an uncertain global macroeconomic environmentposes downside risks, news rom Japan may improve in

2012.Reconstruction expenditure, including inrastructure

projects and tax-breaks or companies will likely support

economic activity, allowing Japan’s economy to grow

1.5–2.0 percent.

Owing to declining exports and rising uelimports, Japan is expected to run a tradedefcit in 2011 or the frst time since 1980.

1 “Auto Industry Argues Against Including Japan in TPP, Highlights Currency.” Inside U.S. Trade 30:3. 20 January 20, 2012.




Asian economies have long been supportedby two pillars o growth: exports anddomestic demand. With weak export

demand rom the West and the possibilityo another recession, the era o export-ledgrowth may be coming to an end.

Malaysia is one o the most export-dependent countries

among its Asian peers and thus remains vulnerable to

headwinds rom abroad. Exports have already begun

to show signs o deceleration, and given weak global

economic conditions, this trend is unlikely to improve in

the months to come. In the light o dwindling exports,

domestic demand may play a key role in propelling the

economy in 2012.

The Malaysian economy started the new year on a positive

note. The central bank announced that, given stable

price conditions, it will maintain its overnight policy rate

at 3.0 percent to ensure liquid ity in the economy. It also

announced steps to liberalize its markets or domestic

oreign exchange and interest rate derivatives. These

measures include allowing residents to trade in oreign

currencies through licensed onshore banks. Further, these

banks will now be permitted to oer ringgit-denominated

interest rate derivatives to non-bank non-residents.

According to the central bank, these measures are

expected to increase the “liquidity, depth and participation

o a wider range o players in the domestic nancial

markets.” Analysts regard this as a positive signal or the

internationalization o the ringgit, which will likely also

encourage oreign investment by allowing banks to oer

innovative products.

Aside rom increased nancial activity, inrastructure

contracts and the completion o already-commissioned

projects under the government’s Economic Transormation

Program (ETP) will likely sustain investment momentum this

year. In the run up to elections, cash handouts, salary hikes,

and subsidies will likely improve domestic consumption.

The government announced a one-time cash handout

o RM500 ($157) or households with incomes below

RM3,000 per month. This is in addition to pay incrementsranging between 7 and 13 percent or 1.4 million civil

servants eective January 1. Moreover, the government has

more than doubled its subsidy on sugar to combat higher

import prices, pushing the total subsidy bill up to RM33.2

billion or this year. Private consumption accounts or more

than hal o Malaysia’s GDP, and a boost to consumer

spending in 2012 will bode well or the economy.

Malaysia




Despite an expected boost to domestic demand, theoutlook or the economy is mixed. The manuacturing

sector has displayed weak perormance in the last ew

months. Malaysia is widely regarded as a springboard or

electronics and electrical goods (E&E) re-exports, which

also make up a bulk o the local manuacturing industry.

In November, industrial production growth slowed to

1.8 percent year-over-year rom 2.9 percent during the

preceding month. In particular, production o E&E goods

contracted by 0.4 percent, ollowing a decline o 1.0

percent in October. Analogously, exports o E&E goods

dropped by 3.5 percent year-over-year during the same

month.

Exports on the whole have experienced a slowdown owing

to slump in demand, especially in the global electronics

industry. The atermath o weather-related supply

disruptions in Japan (an important market) made matters

worse. In November 2011, export growth slowed down

to 8.0 percent year-over-year compared to 15.4 percent

recorded in October. Imports, on the other hand, were

up 8.4 percent year-over-year, more than twice the 4.4percent pace observed during the previous month. China,

Japan, and Singapore are among Malaysia’s top trading

partners, and recently, damp demand conditions in these

countries have hurt Malaysian exports. Furthermore, since

the EU and the United States together account or around

20 percent o Malaysia’s exports, worsening economic

conditions in the West pose considerable downside risks to

Malaysia’s external sector in the months to come.

Thus, unlike the heyday o export-led expansion, Malaysia

and its peers are now aced with the prospects o having

to turn inward in order to achieve economic growth.

Monetary policy remains accommodative o growth, and

the government is taking certain steps to mitigate the

adverse eects o an economic slowdown. While the pillar

o export revenue may not oer much support, domestic

demand will likely continue to drive the economy, which is

expected to expand by around 4.0 percent this year.

Unlike the heyday o export-led expansion,Malaysia and its peers will now have to turninward in order to achieve economic growth.




The Taiwanese economy slipped into arecession ater suering a contraction o 0.3 percent in the ourth quarter o 2011.

This second consecutive quarter o decline was primarilythe result o a sharp contraction in capital ormation and

sluggish exports. Private and government spending also

disappointed during the ourth quarter.

The crux o the problem was bleak exports. Traditionally,

exports have ueled the Taiwanese economy by making up

almost 70 percent o its GDP. Thus, a s lump in exports is

expected to have ripple eects throughout the economy.

Recently, Taiwan’s exports, especially hi-tech goods or

developed markets, have suered because o the Eurozone

crisis. During the ourth quarter alone, exports ell by 4.5

percent in U.S. dollar terms. Moreover, China accounts or

around 40 percent o Taiwan’s exports, but its economic

outlook is cloudy. While economic ties with the mainland

are expected to strengthen, Taiwan’s export perormance

may hinge on nal demand rom China and its other

trading partners in the West.

Anemic exports had negative repercussions on the rest o

the economy, especially manuacturing. Since the island

economy is a hub or reassembling and re-exporting

hi-tech goods, a bulk o the manuacturing sector’s

output is designated or outbound shipments. Thus,

the lack o overseas demand hurt local export-oriented

manuacturing rms, which are struggling to break even.

Following a 4.6 percent year-over-year contraction in

November, industrial production dropped by 8.2 percent

year-over-year in December — the largest drop in the last

seven months. Consequently, business sentiment has also

deteriorated. Investors reacted to global uncertainty by

holding back on private investment and scaling back plans

or building capacity. From September–December 2011,

capital ormation plunged by 19.2 percent year-over-year,

dragging overall GDP growth into negative territory.

Further, manuacturing inventory accumulated while

export orders enjoyed only a marginal gain, thus

oreshadowing a uture slump. The overall composite

leading indicator compiled by the Council o EconomicPlanning Development (CEPD) saw little improvement in

December as it increased 0.5 percent rom a month ago.

Furthermore, the agency’s Monitoring Indicators bemoan

a sluggish economy. Subdued investment is expected to

pose additional challenges to recovery this year, orming a

vicious cycle. Recent data suggests that domestic demand

has also been caught in this cycle, which may weigh

heavily on growth.

Taiwan




Perhaps, Taiwan’s widely anticipated elections in January

2012 and their possible impact on cross-strait relations

increased uncertainty in the last ew months o 2011. The

stock market suered rom this uncertainty as investors

pulled out in avor o more stable markets; market

capitalization in December was about 19 percent lower

than a year ago. Following the re-election o President Ma

Ying-jeou, who avors strengthening ties with China where

many Taiwanese have business interests, some stability may

return to the Taiwanese stock market.

With investor sentiment restored to a certain extent,

Taiwan will likely see some improvement during the rst

hal o the year. In December, the central bank chose to

keep its policy rate constant, which has been unchanged

since last July. Should demand conditions in the economy

ail to suciently recover, the central bank may have to

cut interest rates urther, compromising price stability. The

government may also have to consider boosting stimulus

policies and increase spending, which has been lackluster

in the last ew quarters. With additional downside risks

posed by global uncertainty, economic expansion will likely

slow down rom 4.0 percent in 2011 to a little above 3.0percent this year.

With investorsentiment restored toa certain extent,Taiwan will likely see

some improvementduring the frst hal o the year.




Vietnam

The Vietnamese economy is likely toace several challenges in 2012.

On the domestic ront, the country is grappling with high

infation, persistent budget and current account decits,alling oreign exchange reserves, and a weak currency.

In addition, a host o external challenges emanate rom

an uncertain global macroeconomic environment. First,

declining global demand could dampen Vietnam’s export

sector growth which will infuence employment and

manuacturing sector output. Second, oreign investors

may hold back on any urther investments, which would

in turn deprive the economy o capital, at least until

economic conditions improve. While more aggressive

measures to counter macroeconomic imbalances may

need to be considered, it is unclear whether tougher policy

choices will be made; especially, since some choices could

lead to decreased domestic growth in an already-weak

global economy.

Vietnam’s GDP is estimated to have grown at 5.9 percent

in 2011. Growth was broad-based with agriculture

growing 4 percent, industry and construction growing 5.5

percent, and services recording nearly 7 percent growth.

Furthermore, exports were robust, and tourism recorded

increased ootalls. However, January provided mixed

signals. While retail sales grew 22 percent compared to

last year, Vietnam’s IIP dropped 2.4 percent. The foods

in Thailand are likely to boost Vietnam’s rice exports, and

manuacturers are expected to shit production to Vietnam.

However, these actors will only have a temporary eect

on Vietnam’s economy. Declining commodity prices may

also result in lower export revenues in 2012.

In 2011, an 18.7 percent infation rate, which resulted in

lower consumer and business condence, was a major

downside or the Vietnamese economy. The price rise

was induced by supply-side actors, elevated commodity

prices, and domestic credit growth. Infation appears to

have peaked, and orecasts or 2012 are benign. However,

infation is expected to continue at double-digit levels.

The downward trend in infation is a welcome sign or the

Vietnamese economy and may prompt the central bank

to adopt a more accommodative monetary policy to spurGDP growth. However, easy monetary policy would be a

risky decision, and policymakers may take a more cautious

approach. Moreover, infation orecasts may be revised

upward i the recent hike in the minimum wage exerts

upward pressure on overall price levels in Vietnam.

In addition, the central bank has devalued the currency

our times since November 2009. In 2011 alone, the

dong’s value has eroded by nearly 10 percent against the




U.S. dollar. In 2012, Vietnam’s currency will likely continue

its decline against the dollar due to persistent scal and

current account decits. Furthermore, Vietnam’s dwindling

oreign-exchange reserves mean that the State Bank

o Vietnam (SBV) will not be able infuence the slide by

intervening in the currency markets. On the contrary, the

central bank may resort to currency devaluation yet again

during the rst hal o 2012.

Meanwhile, the government is looking to pursue policies

that create avorable opportunities or oreign investors.

Foreign infows have been a major source o capital inVietnam, accounting or nearly 25 percent o the country’s

investment needs. However, FDI infows recorded a 26

percent decline in 2011 caused partly by a global economic

slowdown and weak macroeconomic undamentals in

Vietnam. FDI fows can address some concerns around

Vietnam’s weak oreign reserves situation. Furthermore,

with domestic investment likely to dip signicantly, oreign

capital can potentially bridge the investment gap. The

government’s ability to usher in reormist policies and

provide some stability to Vietnam’s domestic economy may

be a critical actor in the coming months.

Finally, Vietnam’s troubled banking sector is poised or

a wave o M&A activity. The proportion o bad debts at

Vietnamese banks has risen, and many smaller banks

are unable to repay their debts to the larger domestic

banks. Small banks in distress are likely to be acquired by

larger players while some may opt or mergers in a bid to

strengthen their balance sheets. Vietnam plans to narrow

its banking sector to 15 large commercial banks by 2015.

The restructuring is expected to begin in the rst quarter

o 2012.In the interim, credit growth, especially to the

real estate sector, may be limited. The SBV is expected to

continue its tight monetary stance and limit credit growthto 15–17 percent. However, the central bank’s policies will

ace sti opposition i the cost o credit rises signicantly.

Overall, GDP growth is likely to slow down in 2012.

Owing to the government’s tighter monetary stance, both

private consumption and investment will likely be weaker.

Furthermore, external actors could add to macroeconomic

instability and dampen exports and oreign investments.

GDP growth is expected to moderate to between 4.7 and

5.2 percent in 2012. Surprises, i any, are more likely on the

downside.

The government’s ability to usher in reormistpolicies and provide some stability toVietnam’s domestic economy may be a criticalactor in the coming months.




About the Economistsedior

Dr. Ira Kali

Deloitte Research

Deloitte Services LP

Tel: +1 213 688 4765

E-mail: [email protected]

Dr. Ira Kalish is Director o

Global Economics at Deloitte

Research. He is an expert on global economic issues

as well as the eects o economic, demographic and

social trends on the global business environment.

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Q1 2012 Economic Review

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