2010 - A year of positive growth
Rays of hope shining from Asia
Issue: Feb 2010
The global economy is leaving the 2008/09 financial crisis behind, as reflected by the steady growth rates posted by many economies worldwide. Much of this recovery can be attributed to the massive fiscal and monetary stimulus policies that were introduced by the governments. These have helped to limit the damage last year and laid the foundation for a year of positive growth in 2010. The economic recovery is also expected to be sustained, as seen by the latest composite leading indicators. Recently, the IMF had upgraded its global growth forecast for 2010 from 3.1% to 3.9%, a marked improvement from last year’s contraction of almost 2%. This is a marked improvement from last year’s contraction of almost 2%. The strength of the growth, however, is likely to be uneven as the developed economies continue to work off their excesses, while the relatively unscathed emerging economies build on their strong fundamentals to propel ahead.
Developed economies – headwinds remain
While many developed economies have emerged from the recession between the second or third quarters of 2009 on the back of the inventory cycle, their growth prospects will be challenging as they continue to work off the excesses within their economic systems.
The epicenter of the 2008-09 crisis lies at the heart of the Western financial sectors, which plunged into a free-fall as many loans were written off while financial panic inhibited inter-bank lending. Even as conditions have been much improved as a result of extraordinary measures undertaken by central banks, the process of provisioning for yet more write-downs continues to cast a shadow over many Western financial institutions. In particular, many analysts believe that the mountain of US commercial real estate mortgages that sit on the books of the financial institutions would be the next shoe to drop. The IMF has estimated that total bank write-downs from the financial crisis could total a staggering US$1.6 trillion in Europe and US$1 trillion in the US by end-2010. As such, it is little wonder that credit conditions still remain tight in the US and Europe till today.
Furthermore, as with any post-crisis recovery, the labour market would be slow to pick up as employers remain uncertain or apprehensive of conditions ahead. This time is no different, with both the US and Eurozone grappling with high unemployment rates of 10%. Taking the US as an example, where private consumption represents 70% of the GDP, the weak jobs market has seriously curtailed consumer spending. To the extent that the current high unemployment persists for some time, Western consumers would be reluctant to spend as much as they used to during the pre-crisis days.
In addition, the massive injection of fiscal spending by governments in the developed economies in response to the crisis have left them with mounting levels of government debt and ballooning budget deficits. The magnitude of Japan’s fiscal troubles stand out in this respect, with government debts of close to 200% of GDP and a deficit of 9.1% for the current fiscal year. The need for fiscal restraint among the G3 is, however, countered by the continuing need for fiscal stimulus to support the still fragile economic recovery. This puts the G3 governments in a tricky catch-22 situation. Although the IMF has urged governments not to withdraw their fiscal stimulus too early, the continued piling on of debt is not without consequences, as seen by the recent sovereign ratings downgrade for Greece (and potentially for Portugal in the foreseeable future). While Greece is small in size as compared to the entire Eurozone bloc, there is a real fear that a single sovereign default within the Eurozone may spark off another round of financial panic. Furthermore, in the event that a sovereign default culminates in a bailout by larger Eurozone economies like Germany, the euro’s value could be adversely affected.
Emerging Asia gaining significance on the global stage
Asia, on the other hand, has weathered the global financial crisis well. Even though the trade-oriented Asian economies were severely hit by the sharp slowdown in global trade initially, timely policy support and resilient domestic demand have limited the fallout from the global recession. Years of cultivating intra-regional trade has also helped to fill the void left behind by Western consumers, with China’s RMB4 trillion fiscal package providing significant spillover benefits for its trade partners. As the banking sectors of the US and Europe were brought to their knees due to loan write-downs, most of Asia’s major banks were relatively unscathed. This combination of circumstances thus explains the resilience and the strong recovery as witnessed in Asia.
As a testament to the strength of the region, IMF recently predicted that Asia, excluding Japan, will achieve robust growth of above 7% in 2010. Analysts also generally expect Asia’s medium term growth to be much higher than the global average. The confidence of the analysts could be explained by several factors below.
The global recession had served as a timely reminder that the existing Asian economic model of being heavily dependent on exporting to the developed economies is unsustainable in the long run. While some of the fiscal spending by Asian governments could be seen as stop-gap measures meant to cushion the impact of the financial crisis, a significant portion of the various governments’ fiscal stimulus have been designed with longer-term objectives in mind. They range from investments in much needed infrastructure, schemes to raise productivity to tweaking social safety nets and healthcare systems with the aim of boosting future domestic demand. With typically underleveraged households that have hitherto been saving between 25 to 40% of their disposable income, the huge potential of increased domestic consumption in powering future growth in Asia cannot be emphasized enough. Furthermore, rising income levels and increased urbanization across most of Asia will also contribute to greater domestic demand. Looking from the perspective of trade, more Asian economies will increasingly become the end destination for Asian exports as Western consumers scale back on their spending in the years to come. Hence, a combination of greater domestic demand and closer regional trade links form a virtuous circle that will sustain and strengthen the economic growth of emerging Asia.
Varied recovery profiles and risks
As the developed and emerging economies reveal varied recovery profiles, so do the risks they face differ. As pointed out earlier, economic recovery in the developed economies remain tentative and may stall if governments tighten their monetary and fiscal policies too early.
Conversely for emerging Asia, strong recoveries have stoked inflation and rising asset prices. In most emerging economies, where a higher proportion of consumer spending goes to the purchase of food and fuel, higher commodity prices have translated into rising inflationary pressures in these emerging economies. Loose monetary conditions have also contributed to asset price inflation which, if left unchecked, may trigger drastic downward corrections in the future. These factors have the potential to lead to economic overheating in certain Asian countries if the current accommodative policies are not withdrawn soon enough. Fortunately, the Asian governments are generally cognizant of the risks and are already taking steps to prevent the buildup of an asset bubble.
Betting on Asia
We are all witnesses to a seismic change where emerging Asia capitalizes on the current crisis to increase its significance in the global arena. With strong fundamentals, bright growth prospects and plenty of opportunities, Asia is easily a key bet for investors, companies and individuals alike.
Contributed by Terence Yap of the CapitaLand Economics Unit