Market Overview

Developed Asia Pacific: Regional Economic Review – Q2 2014


Investment and Infrastructure Offset Sluggish Trade Growth


During the first half of 2014, developed Asia Pacific economies faced challenges arising from lukewarm consumption and meek trade growth. Most countries in the region tried boosting their economies with a mix of infrastructure spending and loose monetary policies. Countries that had their trade skewed to China, Asia’s largest economy, faced prospects of slowing trade. This was particularly true with economies such as Australia that exports resources, and Hong Kong, which sells merchandise to China. However, despite milder growth in China, New Zealand still managed to expand its exports to the Middle Kingdom. This was possible because Chinese consumers’ newly acquired taste for dairy and meat products directly benefited the agricultural sector in New Zealand.

Still, most developed Asia Pacific economies witnessed upbeat momentum from the investment industry. This was particularly true in Japan, Australia, New Zealand and Hong Kong. While Singapore’s property sector was willingly constrained by government authorities for fear of a property bubble, the rest of Asia benefited from relatively low interest rates. Housing, office buildings, and big-ticket infrastructure spending were on a steady uptick in most of Asia’s developed economies. In Japan, prospects for corporate and business investments too changed for the better.

Despite a slowdown in consumption, labor markets showed more signs of revival in many parts of Asia. While New Zealand, Hong Kong and Japan showed marked improvement in labor markets, Australia was a lone underperformer primarily because the flagging resources sector failed to keep the jobs momentum up. Along with the consistent improvement in the labor markets though, the specter of inflation also seemed to worry central bankers across the continent.


At a Glance

Japan: The International Monetary Fund (IMF) predicted a GDP growth rate of 1.4% for Japan for the full year 2014, down from its previous forecast of 1.7%.


Australia: Australia’s central bank left its benchmark interest rate unchanged at 2.5% in its latest policy meeting in June 2014. The country expects inflation to range between 2-3% for the year.


Hong Kong:Hong Kong’s consumer prices are forecast to rise 3.4% for the full year 2014, roughly in line with the 3.3% jump witnessed in 2013.


New Zealand:New Zealand expects its economy to grow 4% for the year 2014 and employment levels are forecast to rise by 3% in 2014.


Singapore: Singapore expects GDP growth for the year 2014 to be in the range of 2% to 4%. A modest increase in the manufacturing, transportation and storage sectors are expected to fuel the economy for the year.





Japanese consumers lapped up a whole set of durable merchandise like cars and white goods at a furious pace during the first quarter of 2014. They did so not because they had newfound confidence in their prospects but because of a looming sales tax hike on all kinds of goods. As a result of the fear factor, merchandise flew off Japanese shelves before the sales tax hike eventually came into effect at the beginning of April 2014.

The abnormal consumer behavior in fact did some short term good to Japan’s economy during the first quarter of 2014, boosting quarterly GDP growth to its fastest pace since 2011. But spending tomorrow’s money today left Japanese consumers little else to do during the second quarter of 2014, leading economists to predict a sharp contraction in output during the period.

While the sales tax hike distorted the behavior of consumers, Japanese policymakers are now trying to energize the supply side of the economy by cutting corporate taxes for domestic firms. Cutting corporate taxes is an integral part of Prime Minister Shinzo Abe’s economic policy popularly known as ‘Abenomics’. Currently Japan has one of the highest corporate tax rates anywhere in the world. Economists surmise that paring the taxes progressively will help regain competitiveness and in turn boost employment and wage growth. There has already been some buzz amongst Japanese corporates. Business investment, which is at a level far below that achieved in 2007, showed strong signs of a revival during the first quarter of 2014.

But how fast this enthusiasm will rejuvenate Japan’s listless labor market is an open question. Small and medium sized firms that employ a chunk of Japan’s workforce still seem disinterested. With inflation inching up fast and Japan’s wage growth still meek, economists opine that consumers are expected to adopt a wait-and-watch stance toward their spending plans.


Australia, the star economic performer for the greater part of post-crisis years after 2009, is now showing signs of strain. The handsome growth accrued from a once-in-a-generation mining boom on the back of China’s dynamic economy is looking less likely in the years ahead. For this reason and others, Australia is seeking other trade partners in the region such as Japan to make up for slowing growth in China.

Furthermore, Australia is trying to steer the economy away from its reliance on the resources sector. To be sure, the mining industry is a still a money-spinner for the land down under. Nonetheless, overreliance on the sector had for long driven up the value of the country’s currency, the Australian dollar, and had proved to be inimical to other industries such as manufacturing and tourism. But the shift in Australia’s economic landscape is not likely to be painless. For instance, the country’s unemployment rate is largely expected to remain elevated for the near term.

In the post-financial crisis era, Australia’s labor market used to be the envy of the world, with unemployment treading consistently around the 5% mark. However, the unemployment rate in the country scaled as high as 6% during the early months of 2014. What’s more, even the country’s central bank, the Reserve Bank of Australia, conceded that unemployment will be at elevated levels until mid-2015. This partly explains the country’s interest rate cycle. Aggressive trimming of borrowing costs over the past two years has resulted in Australia’s historically low interest rates.

But how much the low interest rates are helping the economy is anybody’s guess. Economists comment that despite low borrowing costs, Australia’s currency is not budging as much as expected against major currencies in the world. Still, low borrowing costs have proven to be a godsend for Australia’s housing sector, whose strength helped the country register a growth of 3.5% in 2014, the fastest pace in nearly two years.


Trade, Hong Kong economy’s mainstay, clocked lukewarm performance for the first half of 2014. After growing 2.9% for the full year 2013, Hong Kong’s economy posted growth figures of 2.5% for the first quarter of 2014.

Hong Kong had recently faced challenges to trade primarily due to issues arising from its largest trading partner – mainland China. Merchandise exports to the Middle Kingdom essentially remained flat during the first five months of 2014. However, handsome growth in other sectors of the economy compensated for the loss in the momentum in trade. Both tourist arrivals and investments boosted Hong Kong’s economy during the first quarter of 2014.

Tourist arrivals jumped nearly 14% for the first four months of 2014, much faster than the 11.7% witnessed in 2013. Although tourist arrivals leaped over the year-ago period, tourists themselves were not seen indulging themselves in Hong Kong as retail sales of luxury goods and jewelry remained flat.On the other hand, investments in the financial center climbed nearly 3% thanks mainly due to infrastructure projects such as roads and buildings. The strength in the investment sector helped the labor market as well as keeping unemployment low.


New Zealand’s economic recovery continued apace during the first half of 2014. A strong recovery in the construction of both residential and non-residential units saw the property market lift itself from the depths of a natural disaster induced by an earthquake a few years ago.

Further help for New Zealand’s economy came from the export sector. As Asia’s middle class consumed more meat and dairy products, New Zealand’s cattle exporters made merry. With a steady influx of immigrants, New Zealand’s labor market too is witnessing a structural upturn.

In all, New Zealand ended the first quarter of 2014 with growth figures of 3.8%. The construction and property sector single-handedly contributed to two-thirds of the country’s GDP for the quarter. Although business confidence in the second quarter of 2014 slipped mildly from a 20-year high figure in 2013, businesses largely remained confident about the country’s prospects for the year ahead, reported a government survey agency.

Moreover, deft stewardship of the public finances has won New Zealand plaudits from investors. A privatization drive and rising taxes are expected to help New Zealand pare down its long-term debt to GDP ratio over the next six years. With stable inflation and growth, the outlook for New Zealand’s debt improved substantially as suggested by Fitch, a credit rating agency.

The improved outlook, however, has raised the specter of faster interest rate hikes in the country. Already worried about run-away inflation in the wake of robust growth, New Zealand has hiked interest rates at three consecutive policy meeting for a total increase of 75 basis points. Economists surveyed by Bloomberg predict that New Zealand’s borrowing costs, which stand at 3.25%, are expected to go up further in the coming quarters.


Singapore’s trade-dependent economy is facing inflationary pressures. Towards the end of the second quarter of 2014, Singapore’s prices gained 2.7%, much higher than first quarter figures. The cost of living in the trade dependent city state has risen steadily over the past quarter primarily due to increasing road transportation and rental costs. A recent spike in fuel and food costs too tormented the average Singapore resident during the second quarter of 2014.

Setting aside the rise in fuel and food costs, Singapore also faces challenges from structural inflationary factors arising from higher labor costs. The trade outpost’s fertility rate has been falling and the aging population has not been met with an equal rise in the number of immigrant workers. Singapore’s citizens have vociferously protested the arrival of new immigrants in the wake of competition for public resources such as transportation and housing.

Consequently, the country’s government is faced with the challenge of boosting growth while tempering the number immigrants entering the territory. Many sectors, especially the manufacturing-based industries, have held back investments for lack of labor. For its part, Singapore’s government is encouraging the growth of less labor-intensive and high-tech industries aimed at achieving higher GDP growth without boosting immigration. While the government’s plan is expected to produce long-term results, the short-term outlook remains clouded with inflation posing a challenge.

A recent survey by Reuters indicated that industrial output fell during the later months of the second quarter primarily due to a fall in manufacturing activity. A slump in the pharmaceutical and electronics industries tripped industrial output.

The city state expects GDP for 2014 to come around at 2.3%, a modest improvement over 2013 thanks primarily to improved services-based industries such as finance and tourism.


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