Developed Asia Pacific: Regional Economic Review – Q3 2014

Most Economies in the Region Experience Slowdown, New Zealand Surges

Most of the developed economies in the Asia Pacific region, except New Zealand, experienced a slowdown during the review period. Japan, the biggest of these economies, is facing declining private consumption after the sales tax increase in April. Moreover, exports have softened despite a falling yen even as manufacturers lose confidence in making goods at home. However, the government is hopeful that the pick-up in the job market and the increase in wages will give a boost to private consumption and the economy.

Though Australia’s economy is feeling the heat as the mining-led export boom fades after a decade of growth, other sectors of the economy such as housing, education, and tourism have emerged as the current growth drivers, generating new revenues and jobs. Meanwhile, New Zealand’s small economy registered the fastest growth rate seen in the last 10 years on an annualized basis, during the second quarter, with the services sector surpassing traditional bread-winners such as construction as well as meat and dairy exports in driving economic growth.

Singapore’s exports, excluding oil, rose 6.0% in August 2014 compared to the year-ago period, helped by the increased shipment of petrochemicals and pharmaceuticals, according to a Reuters news report. As the spotlight shifted to pro-democracy street protests, Hong Kong’s economy, which is dependent on domestic consumption, retail, and trade contracted in the second quarter due to a fall in business investment and slow spending by visitors from mainland China.

At a Glance

Japan: The Bank of Japan left its monetary policy unchanged as expected in its recent meeting, but decided not to strengthen the QE program in a sign of confidence in its outlook for the economy. The central bank governor said its consumer inflation target of 2% is achievable and the yen’s current level of weakness is satisfactory.

Australia: The losses of the mining sector may prove to be an opportunity for other sectors of the economy such as education and tourism, which were neglected during the resource-led boom.

New Zealand:New Zealand’s economic recovery gained momentum during the second quarter. This time, the services industry, which comprises business services such as software development and retail activity, was the main driver of the latest growth spurt.

Singapore:Singapore’s exports, excluding oil, rose 6.0% in August compared to the year-ago period, helped by the increased shipment of petrochemicals and pharmaceuticals, according to a Reuters news report.

Hong Kong:Hong Kong witnessed pro-democracy protests demanding the resignation of Chief Executive Leung Chun-ying towards the end of the third quarter. While the protest has not shown signs of escalation yet, it did affect investors’ perceptions about the economy.

JAPAN: CENTRAL BANK KEEPS POLICY UNCHANGED

In a sign of confidence in its outlook for the economy, the Bank of Japan left its monetary policy unchanged as expected in its recent meeting, but decided not to strengthen the QE program. The central bank governor said its consumer inflation target of 2% is achievable and the yen’s current level of weakness is satisfactory.

Japan’s economy contracted more than expected during the second quarter as the sales tax increase on all sorts of consumer goods sold in the country came into effect in April 2014. To put things in perspective, the 7.1% annualized contraction compared to the first quarter was the largest decline for the former export powerhouse since the global recession of 2009. With figures for the month of August showing a fall in industrial output and consumption, it appears that the lingering effect of the sales tax hike is likely to reflect in economic growth figures in the months ahead as well.

One of the keynotes of the Japanese prime minister’s “Abenomics” program was to increase real wages and thereby induce consumers to spend more and in turn encourage companies to boost investments. The end result, or so it was thought, would be increased prices that would help the economy come out of prolonged deflation. That plan so far has not borne fruit. The Economist reported recently that many feel that the peculiar structure of the Japanese labor market, which is tethered to regular, highly-paid employees who can’t be fired and non-regular, poorly paid workers who do not enjoy those privileges, is partly to blame. The unemployment rate fell to 3.5% in August compared to 3.8% in July as the country’s labor market remains tight. On a positive note, average wages, which do not take into account extra payments, rose for the third month in a row in August.

Despite a devalued yen, exports have been slow in gaining momentum recently. Analysts have pointed to cyclical factors such as the slow recovery in emerging markets and weather-related shortfall in demand in the U.S. for the slack in exports. Moreover, the cost of energy imports, which had gone up substantially in the aftermath of the shutdown of the country’s nuclear reactors after the Fukushima disaster in 2011, fell during the month as oil prices moderated. Still, the August trade deficit came in less than what analysts had expected as exports contracted only marginally compared to the July figures, indicating a slight pick-up.

Although the falling yen has benefitted many Japanese corporations, these companies have become increasingly reluctant to produce goods at home, opting instead for locations closer to their export markets that could give them a cost advantage. On its part, the Abe administration has tried to reduce the corporate tax rate to woo these firms back.

AUSTRALIA: GROWTH SLOWS, BUT JOBLESS RATE DROPS

Australia’s economy slowed during the second quarter, clocking a meager 0.5% growth that came in slightly above expectations. Predictably, the decline in net exports was the main factor affecting growth, while the increase in inventories and household consumption offered some solace.

Australia’s resources-led boom, which was fed by China’s voracious appetite for commodities such as iron ore, has clearly run out of steam. The resultant weakness is being reflected in indicators such as business confidence and consumer sentiment, going by the latest data available.

According to a report in The Sydney Morning Herald, the economy and employment remain the foremost concerns for Australian households, with a consumer sentiment index recording a 4.6% seasonally adjusted fall in September compared to a 3.8% increase in August. Also affecting sentiment were budget related issues such as increased charges for various services and the cutback of certain welfare measures such as income support for the unemployed.

Business confidence dipped in August after improving in July as industries felt the near-term outlook for trading remains bleak. However, new construction orders showed that the housing sector is in good shape, partly helped by the current low 2.5% borrowing costs. Home prices increased 11% in the major cities of Australia during the January-August period. As the housing market gains momentum, state governments stand to earn good revenues from property taxes.

Meanwhile, the losses of the mining sector may prove to be an opportunity for other sectors of the economy such as education and tourism, which were neglected during the resource-led boom. For instance, tourism adds A$30 billion a year to the coffers and employs more than 500,000 Australians. The shift in focus from mining was evident from the employment numbers for August, which showed that more than 120,000 jobs were added in the construction and education sectors during the month.

NEW ZEALAND: SERVICES INDUSTRY IS THE NEW GROWTH DRIVER

Unlike its larger neighbor Australia, New Zealand’s economic recovery gained momentum during the second quarter. The 3.9% annualized growth is the fastest rate registered in 10 years. The country’s growth so far had been driven by construction, meat and dairy exports, as well as strong domestic consumption.

Most of the country’s food exports were bound for China, while the economy also was fueled from a $35-billion effort to rebuild earthquake-hit Christchurch and the strong pace of immigration that buoyed the labor force. Now, the services industry, which comprises business services such as software development and retail activity, is the driver of the latest growth spurt.

Still, dairy prices have fallen 50% from the levels seen in February even as the construction sector and domestic activity have moderated. Russia’s ban on food imports, which has hit Western economies, may also impact New Zealand as it vies for a share of the food market with European exports. Meanwhile, the Reserve Bank of New Zealand decided to leave interest rates untouched at 3.5% after four hikes until July. Defending the decision, the governor of the Bank said the South Pacific economy’s growth is set to moderate going forward due to the declining price of its key export commodity and the impact of monetary tightening so far.

In nation-wide elections held on September 20th, the incumbent Prime Minister John Key returned to power for a third time. Mr. Key has promised to give some tax sops to low and middle-income earners if the budget shows a surplus in 2015.

SINGAPORE: PETROCHEMICALS, PHARMA BOOST EXPORTS

Singapore’s exports, excluding oil, rose 6.0% in August 2014 compared to the year-ago period, helped by the increased shipment of petrochemicals and pharmaceuticals, according to a Reuters news report. However, the trade-dependent economy’s exports to major global markets such as the United States and the European Union registered a slowdown compared to the previous month. Despite the increase in pharma exports, Singapore’s electronics exports slumped in August due to stiff regional competition from Taiwan and South Korea and lack of popular gadgets such as smartphones in its product line-up.

In fact, manufacturing in the island state shrunk in August for the first time in the year due to the fall in new orders and slowing factory activity across Asia, as a Reuters report pointed out. Still, the economy just about managed to avoid a contraction in the second quarter. The improvement in trade data comes ahead of the central bank’s meeting in October. The bank is expected to maintain its tight monetary policy.

Singapore depends on tourism for about 4% of its gross domestic product. This year, the revenue stream was hit by a 30% decline in Chinese tourists bound for the city-state’s casinos due to the travel rules implemented by China, protests in Thailand, and passenger concerns after the disappearance of a Malaysian Airlines plane. But the country stands to benefit from the forecast $80 million related to its hosting of the upcoming Formula One race on September 21st.

Encouragingly, consumer prices in Singapore went up only 1.2% in July 2014 from the year-ago period, the slowest pace of increase since March. And the government of Singapore plans to spend $3.2 billion to provide better health care for its aging citizens. In fact, Singapore pushed Hong Kong to the second place in a Bloomberg ranking of the world’s most efficient health-care systems in 2014.

HONG KONG: PROTESTS CAST A SHADOW OVER SLOWING ECONOMY

Hong Kong witnessed pro-democracy protests demanding the resignation of Chief Executive Leung Chun-ying towards the end of the third quarter. While the protest has not shown signs of escalation yet, it did affect investors’ perceptions about the economy.

Hong Kong’s economy contracted 0.1% in the second quarter compared to a 0.3% growth in the previous quarter due to the fall in business investment and consumption, while unemployment increased in July.

The fall in consumption was due to low spending by tourists. Retail sales have been on the decline for five months in a row as customers cut down on buying luxury goods such as jewelry and watches as well as weak domestic spending, a Reuters report said.

The retail sector in Hong Kong is predominantly supported by visitors from mainland China. Besides retail, consumption and trade are the main drivers of Hong Kong’s economy. Accordingly, the government cut its growth forecast for the year to a range of 2 to 3% from its earlier view of a 3 to 4% growth. It appears that only improved economic conditions on the mainland will foster Hong Kong’s gradual recovery.

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