Ringing in a joyous festive season in Asia

The positive mood is in stark contrast to last Christmas’ gloom and doom

Issue: Dec 2009

Ringing in a joyous festive season

What a difference a year has made. Towards the end of 2008, consumers worldwide were like deer caught in the headlights, paralysed by fear as the global economy seemed headed for another Great Depression.

The US S&P 500 stock index had lost more than 40% from its peak in October 2007, US housing prices had dropped 20% from their 2006 peak, and the US National Bureau of Economic Research (NBER) had just announced on December 11, 2008 that the US had been in a recession for the past year.

Fresh in the mind of many consumers was the September 2008 collapse of Lehman Brothers, which set off a financial tsunami that rapidly paralysed global financial markets. Seemingly indestructible giants like AIG and Merrill Lynch were brought to their knees, banks were announcing hundreds of billions of losses, trillions of dollars of wealth had been wiped out, and the global financial system was on life support.

With large scale layoffs becoming a regular event, consumer confidence worldwide was near historic lows and belt-tightening was the order of the day. Despite massive price-slashing, retail sales in the US were down a shocking 12% year-on-year in December 2008. A gloomy festive season for the retailers was all but assured.

Governments to the rescue, with recovery gaining traction

Fast forward to December 2009 and the difference could not have been starker. The massive coordinated global fiscal and monetary stimulus of governments worldwide had managed to arrest the tailspin of the global economy. Key central banks had slashed benchmark interest rates aggressively, established USD swap lines and implemented emergency loans to stabilise the financial sector.

As governments worldwide signalled that they would do everything necessary to resuscitate the financial sector and cushion the fallout on the economy, fear began to recede. The Libor-OIS spread, an indicator for the relative stress in the money markets, has retreated from the peak in September 2008 and is currently back to pre-Lehman levels.

Exhibit 1: Interest rate spreads back to pre-Lehman levels


Asia to grow much faster than the West

As confidence returns, the nascent global economic recovery has begun to gain traction. In particular, the recovery in Asia has outperformed that of the West, as its financial system was relatively shielded from the financial crisis. The fundamentals of the Asian economies were also generally better than the West, with lower levels of leverage and little evidence of a housing bubble.

The economic growth of the Asian economies was further supported by aggressive fiscal stimulus. For example, the Chinese government rolled out a massive RMB 4 trillion stimulus package, equivalent to 16% of its GDP. In Singapore, the government responded swiftly by announcing a Resilience Package, which included several measures to help the economy through the recession. One notable component of the fiscal package is the Jobs Credit Scheme — a S$4.5 billion initiative designed to subsidise employers’ wage bills and preserve jobs. Following the success of the package in keeping unemployment down, it was announced in October that the scheme would be extended till June 2010.

Going into the crisis with stronger fundamentals, the growth prospects for the region remain much better than the West for 2010. In fact, most Asian economies are expected to show respectable growth in 2010, with economists forecasting China and India’s growth to be as high as 9.6% and 7.6% respectively.

Exhibit 2: GDP growth forecasts for 2009 & 2010



Source: Consensus Forecast Nov 2009 Survey

Stabilisation in the labour markets has followed in the wake of improving economic conditions. Massive infrastructural investments from government fiscal stimulus policies across the region have created numerous jobs. Furthermore, as export orders recover, factories are beginning to hum again. To date, the unemployment rate in Chinese cities has stabilised at 4.3%. Singapore’s labour market, which lost a total of 13,900 jobs in the first half of this year, has rebounded strongly by adding 15,400 jobs in the 3rd quarter.

China’s immense consumption potential

Massive government stimulus, stronger economic fundamentals and improving labour conditions have underpinned the recovery in consumption in the Asian economies as a whole. By and large, retail spending promises to grow at a healthy level this Christmas, especially in the high-growth emerging market of China.

China’s population of 1.3 billion represents a market that cannot be ignored. Rising average income per capita, increasing urbanisation and a rapidly expanding middle and upper class are the key ingredients for consumption spending to grow in the country. As things stand, China’s shopping scene is already home to some of the world’s top luxury brands like Louis Vuitton and Prada while more urbanites drive European luxury cars as a show of their growing spending power.

At the same time, the impact of China’s rural population should not be underestimated as well by virtue of its sheer size. While their spending capacity cannot match that of their urban counterparts, the recent recession has reminded investors of the importance of rural consumers in supporting domestic consumption. This is best seen by the surge in sales of automobiles and home appliances following the Chinese government’s decision to subsidise such purchases made by rural consumers as part of its fiscal stimulus policy.

Ringing in the festive season

With the global economic recovery gaining momentum, the fear that has gripped most economies worldwide has been replaced by a mood of cautious optimism, especially in Asia. The pace and magnitude of the recovery in Asia has ostensibly lifted consumer confidence, which promises to bring some cheer for Asian retailers and consumers alike in the coming festive season.

Contributed by Terence Yap of the CapitaLand Economics Unit

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