First Quarter 2014 Economic Review

Trade brings cheer even as investment and consumption disappoint

The byword for economic prospects in emerging Asia Pacific economies during the first quarter of 2014 was “optimism”. The countries in the region, despite undergoing a torrent of political activity and struggle, pinned their hopes on a revival in global trade. With other avenues of growth such as investment and consumption showing little promise, the emphasis on global trade took on even greater importance.

Prospects for China, the region’s largest economy, however, remained muted. A slowdown in the domestic economy arising from stagnant property prices and listless exports threatened to trigger a similar slowdown in neighboring economies as well. Nonetheless, the export-oriented economies in the region such as South Korea, Taiwan and Malaysia did a good job of redirecting their exports to the developed markets of the European Union and the U.S. where growth prospects have been on a steady uptick.

Many large consumption-based economies such as India and Indonesia too put their houses in order right in time for the upcoming nation-wide elections during the second quarter of 2014. India and Indonesia, Asia’s second and third most populous economies, respectively, doubled down on chronic current account deficits through a series of interest rate hikes and import curbs. While the serial interest rate hikes took a toll on growth, they also helped exorcise the headaches arising from persistently high inflation. Both these economies are now banking on investment-led growth.

Meanwhile, the only country hanging its head in the region was Thailand. With a political crisis in the country showing no signs of abating, the country is suffering a self-inflicted economic wound. Major parts of the economy such as tourism have already succumbed to the political problems. For now, the central bank in the country is bearing the burden of the economy.

The Philippines, on the other hand, was the region’s star performer for the most part of 2013, attracting foreign investors, winning higher credit ratings, and boosting exports and consumer confidence.

China: Tumbling exports and falling prices set up an economic challenge

China ’s economy is facing a series of challenges. Slackening trade growth, stagnating property prices, and slowing investment in China has led to concerns that the world’s second largest economy will not meet its target of 7.5% GDP growth for the year 2014. If indeed China does fall short of this figure, it will be the first time the country will have missed its growth target since 1998.

What is more surprising about China’s economic concern is the target itself. Typically China sets its bar very high when it comes to economic matters.  That the 7.5% annual GDP growth target is one of the smallest in nearly two decades has economists across the world worried about the severity of China’s slowdown. Not surprisingly, analysts have rushed to peg China’s growth for the year at 7.4%, the slowest pace in 22 years.

Some signs of the slowdown are already evident in consumer prices. While consumer prices fell a bit during the first quarter, producer prices were caught up in a downward spiral for the 25 th consecutive month in March 2014.

The famed Chinese export engine that has churned out toys and machinery, and lately highly engineered goods, is in a state of flux. As the manufacturing industries worked below potential, China imported less of the raw materials that were used to produce manufactured goods. Consequently, Chinese exports and imports have either fallen or have grown only anemically in recent months.

As if these challenges were not enough, home sales across China fell 5% and property construction slumped 27% during the first two months of the year, with some property developers going under.

The slump in growth has rekindled a debate amongst Chinese officials over how to get their country’s economy back on track.  Chinese officials now seem to acknowledge that their model of investment-led growth is not paying off. Consequently, the country’s Premier Li Keqiang downplayed expectations for a grand fiscal stimulus, while at the same time, promising some funds for reconstruction and building railway tracks.

With China trying to engineer structural reforms aimed at medium and long-term growth, economists surveyed by Bloomberg warn that short-term growth due to lack of huge investments could come below expectations.

India: Nations goes to election amidst signs of a nascent recovery

As citizens in India voted in the general elections to decide their rulers for the next five years in April, India’s economy was charting its own course. While the country’s election results are expected to have a significant bearing on the prospects for the Indian economy, economists generally agree that the cocktail of high inflation, low investment and policy deadlocks have been posing formidable challenges.

The country’s GDP growth in the current fiscal year is expected to grow at half the pace of three years ago. India’s economy experienced some of its challenging moments in mid-2013 as the country’s currency plunged in the wake of ballooning current account deficits.

However, as the country battled chronic current account deficits by making it harder to import gold, economic prospects have shown signs of reviving. Even though growth will be down 4.6% for 2014, the International Monetary Fund (IMF) forecast output will touch 5.4% during the next year.

But the nascent recovery is likely to post its own set of challenges to India. As the country’s exchange rate plunged in response to talk of slowing monetary stimulus in the U.S. the country regained some trade competitiveness.  Lately, however, the Indian currency strengthened quite a bit in light of expectations of a recovery in the country in recent months. And the surge in the value of the Indian currency is likely to cause headaches for exporters in the quarters ahead.

What’s more, India’s dependency on external financing and rapid price gains coupled with a high interest-rate regime is still expected to pose hurdles to investment-led growth.

South Korea: Exports add wind to the sails

South Korea ’s economy firmed up during the first quarter of 2014. As South Korea sold more of its wares such as cars, chips, and smartphones to both the European Union and the U.S. exports from the country soared. In fact, South Korea’s trade figures, which are seen as a bellwether of global trade, brought in much cheer to the wider trading world in Asia and the West.

It is generally viewed that the uptick in the South Korean economy began towards the end of 2013. A mix of surge in overseas sales and gain in both business and consumer confidence engineered a growth of nearly 3% in 2013, much higher than the figures for 2012.

A slew of data confirmed that the export-dependent nation is doing all it can do to keep the momentum going in 2014. A gauge of manufacturing activity, a mark of housing prices and an index of inflation have all been on a steady uptick in recent months.

Nonetheless, some South Korea watchers are adding a word of caution to 2014’s momentum story. Despite a broad growth in exports, South Korea’s sales to China have been disappointing in recent months, a direct reflection of challenging economic conditions in the Middle Kingdom.

Despite all the signs of a pickup in demand, South Korea’s consumer price gain of 1.3% in March in fact is far below the country’s targeted bottom range of 2.5%. As a result, the South Korean central bank is being cautious with its interest rate policy. The bank has left rates untouched since May 2013.

High on manufacturing prowess but low on services offerings, some economists opine that the South Korean economy is operating far below its potential. And the country’s political leadership is trying to correct this with structural changes. By any counts, the share of services relative to GDP in the South Korean economy is much smaller in comparison to economies such as Japan, the U.S. and the U.K. The country aims to spend nearly $3.7 billion over the next three years to boost the share of services in the economy.

With this, South Korea aims to shoot two birds with one stone. Economists comment that while services alone can lift the country’s GDP on the one hand, a growth in services can insulate the trade-dependent economy from the vagaries of global growth by strengthening the domestic economy.

South Korea’s finance ministry issued bullish growth forecasts of 3.9% for 2014, far higher than the 2.8% growth witnessed in 2013.

Taiwan: Lukewarm export figures fail to dampen overall enthusiasm

Taiwan ’ s politics, and by extension its economy, got a bit tricky during the first quarter of 2014.

While Taiwan and China have been at loggerheads over the territorial sovereignty of Taiwan itself, trade between Taiwan and China has grown rapidly in the past ten years. But a move by Taiwan’s government aimed at further strengthening trade and services ties between Taiwan and China was met with protests from Taiwanese students in March 2014. Arguing that ever closer trade ties with China would put small and mid-sized Taiwanese firms at a disadvantage over China’s state-owned champions, protesters have called for a more thorough scrutiny of the Taiwanese government plan.

Even as the issue was unresolved, other economic data showed that Taiwan is struggling to catch up in the export markets. While other export-dependent economies in the region such as South Korea have been able to capitalize on a recovery in the developed markets of the European Union and the U.S. Taiwan is yet to make a mark on the export front. For instance, growth in export figures for the first two months of 2014 inched up a meager 0.4%.

Nonetheless, Taiwan’s central bank forecast a higher growth rate for the island for 2014. One reason for the central bank’s optimism stems from the expectation that Taiwan will eventually catch up in the exports markets sooner rather than later. Unemployment and consumer confidence figures in Taiwan have largely improved over the past six months. Still, Taiwan’s real-estate prices soared to nearly a five-year high in early 2014.

All these factors have raised speculation that Taiwan’s central bank will hike borrowing costs going forward, a survey of security traders by Bloomberg showed.

Indonesia: Hike in interest rate arrests inflation buts knocks growth as well

After being battered by an outflow of capital and a steep slide in the value of its currency for the most part of the past year, Indonesia’s economy is finally finding its footing. As the country’s current account deficit ballooned and imported inflation surged, Indonesia embarked on an interest rate hiking spree since mid-2013 to steady its ship.

The painful medicine of interest rate hikes of the past year is now bearing some fruit. Firstly, consumer price growth tempered down to 7.3% in March, the first time the inflation beast fell below the 8% mark since October last year. Secondly, interest rate hikes helped bring down the chronic current account deficit, which surpassed the 4.4% of GDP mark during mid-2013.

Bringing down the current account deficit is providing some lasting respite for the Indonesian economy. As confidence in the archipelago improved, it appears that international investors may once again be ready to trust the country with their money. As funds steadily trickled through Indonesia’s capital markets, the country’s rupiah, which had plunged 21% in the past year, has reversed course, strengthening 7% thus far this year.

Investment by domestic firms is another story. The country is getting ready for all-important presidential election to decide a future leader in the second quarter of 2014. High interest rates coupled with a leadership change has prompted Indonesian firms to put investment plans on the back burner for the year.

Without a helping hand from investments, Indonesia’s economic growth is forecast to range between 5.5% and 5.8%, the slowest pace of growth since 2009.

Thailand: Political unrest mutates into an economic challenge

Thailand ’s economy suffered a further downturn during the first quarter of 2014 as the political crisis engulfing country’s capital, Bangkok, intensified. Serial accusations by the opposition over the legitimacy of Thailand’s ruling government has left supporters of both the opposition and the government fighting it out in Bangkok’s streets, often violently. Worse, the violence has been prolonged, lasting for more than 100 days and still counting.

The political malice has in turn infected the economy. Afraid of visiting Thailand at a time of political unrest, many foreign tourists have put off their holiday plans to visit the country. Tourists visiting Thailand during the first two months of 2014 numbered just 45,000 down from 75,000 during the same time last year. 

Thailand’s consumers have become downbeat as well. With investments dwindling and investment decisions held up amidst the confusion, Thailand’s consumer confidence fell to the lowest level in over 12 years in February 2014. Credit rating agencies such as Fitch and Moody’s raised concerns about the creditworthiness of country amidst political tensions.

In the absence of coherent political leadership it was left to Thailand’s central bank to keep the demand going. The Bank of Thailand cut interest rates to 2% to cushion the blow to the economy.

Thailand’s state planning agency forecast growth figures in the range of 3% to 4% down from its previous range of 4% to 5%.

Philippines: Exports power a stellar economy amidst lurking inflation

Philippines ’s stellar economic performance in 2013 got a pat on the back during the first quarter of 2014.

The Southeast Asian economy had largely avoided the troubles that the country’s neighbors went through in 2013 primarily by implementing prudent public policies that boosted investments, contained inflation, and promoted consumption.

During the first months of 2014, the Philippines managed to boost its overseas sales by more than 20%. With some manufacturing-oriented economies in the region experiencing political turmoil, the Philippines has started to attract the attention of international investors. For instance, the Philippine Exporters Confederation reported that a slew of Canadian, Chinese and American firms were scouting for industrial land to set up export-based industries in the country.

Improving confidence in the Philippine economy points to a larger trend based on structural reform. Thanks to prudent fiscal and monetary policy of recent years, Philippines won its first ever investment-grade bond rating from the international credit ratings agencies Fitch and Standard & Poor’s. The Philippines has largely won the favor of international investors with a healthy mix of growth in consumer spending and infrastructure spending projects over the past many quarters. Foreign direct investments in the country doubled in the 4-year period between 2008 and 2012. Even the World Bank took note of Philippine growth prospects by moving the country up 30 places in a ranking on ease of doing business in late 2013. The Philippines has also largely managed, for a long time, to achieve its economic gains without a commensurate increase in inflation as well.

Nonetheless, this sweet spot was threatened by a sharp jump in price gains to 4.2% in January – a 26-month high figure. Although inflation tempered in February, the Philippine central bank reported that it will be watchful of the inflation scenario.

Malaysia: Cut in subsidies earns consumer wrath and inflation

Malaysia ’s government undertook the painful work of cutting state subsidies for electricity and fuel for a substantial chunk of its populace. An across the board 15% hike in the cost of electricity, sugar, and gasoline prices will translate into the first set of higher household bills for Malaysians since 2008.

Naturally, Malaysian consumers are not happy with their higher bills. Nonetheless, Malaysia’s government has said that a cut in subsidies was a necessary step in steadying the country’s finances. It also justified the price hikes arguing that a transformation to a market-based pricing scheme for essential goods will do much longer-term good.

But economists comment that the short-term effects are likely to be more tangible and probably easier to measure. Not surprisingly, the morale of consumers is also at the lowest level since  2009. A cut in subsidies trickling into the wider economy also threatened to push inflation up, reported economists surveyed by Bloomberg.

Malaysia’s overall economy, however, seems little bothered by the glitches in private consumption. Drawing strength from strong exports, the country is expected to grow in the range of 4.5% to 5.5% in 2014, according to the central bank.