Recovery & risk: Asian economic

prospects

in 2014

Telstra/Asia House

Asia Business Champions

June 2014

Dr Simon Baptist

Chief Economist

0

5,000

10,000

15,000

20,000

25,000

30,000

China

US

India

Japan

ASEAN

Germany

Brazil

Russia

UK

Mexico

France

Korea

2007

2020

GDP, purchasing power parity; 2005$US bn. Source: The Economist Intelligence Unit.

Global economic heft is shifting

Three big themes for 2014 and beyond

Synchronised upturn in the major developed economies

US recovery is deepening; broad based

Europe is growing, though fitfully

Japan: Abenomics helping, but no panacea

Tighter financial conditions globally

It’s all about the Fed; less liquidity

Will capital flight destabilise developing

economies? Is there risk of an EM crisis?

Back to basics in emerging markets

China, India, Brazil, etc: reforming, resetting and rebalancing

Asia economic forecast

China is still one of Asia’s fastest growing economies

GDP growth 2014-18 average % pa. Source: The Economist Intelligence Unit.

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1

2

3

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6

7

8

9

PG KH MM LK CN VN IN ID PH BD MY SG TH KR PK TW AU NZ HK JP

But China is slowing, and India and Indonesia are speeding up

Most new Asian economic activity will be in China and

India

Additional GDP 2014-2018, nominal US$. Source: The Economist Intelligence Unit.

0

1,000

2,000

3,000

4,000

5,000

6,000

CN IN ID JP KR AU TH MY PH SG

Indonesia, South Korea and Thailand are also EMs to watch

Many Asian economies are passing the consumption

tipping point of US$3-5,000 per person

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

TW MY CN TH ID LK PH PG VN IN

Consumption per person 2018, nominal US$. Source: The Economist Intelligence Unit.

Big Asian economies are becoming middle income

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2095

China India Japan Germany US World

Asia has some of the world’s oldest and youngest countries

Source: UN World Population Prospects; Haver Analytics

Median age

India is an exceptionally

young country!!!

China

National Bureau of Statistics and Economist Intelligence Unit

China: Slowing but setting a better foundation

Income over Rmb40,000

• Despite the slowdown, we

expect 7.3% growth in 2014

• Still very fast expansion for a

US$10trn economy

• Government looking to set

foundation for solid growth;

away from “bubble” economy

• Rising incomes supporting

consumer spending

But a new era has started;

growth will average 6.5% over

the next few years

Income over Rmb25,000

Wages in China are also rising rapidly:

this is having have big implications

Source: The Economist Intelligence Unit

BR

CN

DE

IN

MX

ZA

TR

US

100

150

200

250

2006 2008 2010 2012Year

Nom

inal w

age in

dex, lo

cal c

urr

ency, 2005=

100

Go west: China is not a single story

• Wages in Shanghai

are approaching

those of some OECD

countries

• Wages differ

between provinces

by up to a factor of

2.5

• Competition for

migrants between

cities is increasing

• Western and central

provinces are

cheaper, but logistics

are more challenging

Source: The Economist Intelligence Unit

Guangdong

Henan

Shanghai

Sichuan

Tianjin

60000

90000

120000

2013 2014 2015 2016 2017 2018Year

Nom

inal w

ages, R

MB

per

year

China’s cities are coming into focus

But the transition from an investment- and export-led economy will entail lower

growth, and this will not be easy to manage

Dongguan

Erdos

Guangzhou Hefei

Luzhou, Sichuan

Qitaihe, HLJ

Shijiazhuang

Taiyuan

10

20

30

40

50

60

70

80

90

100

20 30 40 50 60 70 80 90 100 110

Urb

an

isati

on

rate

(%

)

Per head consumption ('000)

Urbanisation and consumption, 2030

Source: The Economist Intelligence Unit

China challenges consensus on politics and development

• The growth rate in China, with strong government control, has been amongst

the fastest in the world

• Chinese firms have faced resistance due to perceptions of being too close to

the government

• Governments in Africa, Latin America and the rest of Asia have used the

Chinese example to rebuff calls for greater democracy or openness

BUT

• Will innovation and creativity, needed once catch-up growth phase ends, be

possible without such freedoms?

• Greater demands from the middle classes for opportunities and freedom have

led to social unrest in other countries; can China buck the trend?

Chinese firms are also investing record amounts overseas

Chinese outward FDI will top US$200bn in 2018

Japan

Japan: No surge in sight, but better outlook

-20

-15

-10

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- Q1

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- Q2

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- Q2

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- Q3

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- Q4

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- Q1

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-6

-4

-2

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12Tankan business sentiment

Fixed capital investment

• “Abenomics”—fiscal stimulus,

structural reforms, money-printing

Twice as much easing as the US

Fed, as share of GDP

• Outlook has improved

Stronger business investment;

three quarters of +8-9% growth

• Inflation is back

• Consumption tax hike will hit

consumer confidence

• Population, workforce will contract

• Outlook? Not rapid growth, but

sustained, moderate growth

• Nationalism a worry

Tankan: diffusion index. Gross fixed capital formation, % change, annual rate.

Source: Tankan business survey, all enterprises; Cabinet office for investment

India

India: Slower growth, high inflation…but plenty of upside

• India’s economy soared between

2004-2010

Powered by foreign investment

But deep problems—politics, poor

infrastructure, over-regulation,

labour issues—never addressed

• Bubble economy led to high inflation,

rising debt, slow growth

• On the road back

Better economic management

Still-young population; education?

Politics is still disruptive, divisive

• Watch Indonesia for a similar story

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GDP Inflation

Real GDP, % change; Consumer price index (CPI), % change

YoY. Source: National government, Economist Intelligence Unit

ASEAN

ASEAN is set to become a major economic power

The economy of the ASEAN-6 will be as big as Germany’s by 2018

Source: The Economist Intelligence Unit

ASEAN consumers are becoming richer

Source: The Economist Intelligence Unit

More people’s income will pass the critical US$5,000 level

Asian business environment

What determines an investor’s location decision?

• Wages in nominal, exchange-rate adjusted terms

• Productivity of workers

• Availability and cost of raw materials

• Business environment

• Logistics, profit repatriation, FDI policy, trade barriers, unions, red tape

• Public relations and corporate social responsibility

• Political stability

• Environmental and natural disaster threat

• Diversification of supply chains

• Proximity to markets

• Balance of skills and cost in each of local and expatriate workforces

The EIU combines all of these into a measure of operational risk….

The business environment in Asia can be challenging

• Operational risk in Asia

can be high,

particularly in

Myanmar

• Investors need to

consider the types of

risk they can

competitively manage

• In some cases the FDI

environment is

different from the

overall business

environment, eg

Vietnam more

welcoming for FDI than

its total score suggests Source: The Economist Intelligence Unit

Asian companies still investing in China, but other markets

are catching up

Source: Economist Corporate Network Asia Business Outlook Survey 2014

India looks good for labour-intensive manufacturers

• India, Philippines,

Peru, Taiwan and

Poland are

becoming more

attractive

compared to

China

• Bangladesh,

Vietnam, Nigeria,

Russia and Brazil

are getting less

attractive

Labour

competitiveness

increasing against

China

Labour

competitiveness

decreasing

against China •Source: Economist Intelligence Unit