China and Japan are stark examples of the differences between some Asian economies at the moment with one admittedly slowing but still growing economy counterpoised by a largely stagnant Japanese economy. China is forecast to see only modest gross domestic product (GDP) gains in 2013, but it is still growing, while Japan is projected to see almost no growth, which must be a concern for global corporate treasurers assessing the overall Asian growth picture and where best to put their money.
According to Jason Thomas, director of research at The Carlyle Group, speaking at the Association for Financial Professionals (AFP) Conference 2012 in Miami late last year, China saw its GDP rate slow to 6.5% during the first nine months of 2012. Pending updated numbers for the end of 2012, it is unclear if this represented a cyclical slowdown, or the start of a secular shift to a lower growth rate. But it is clear that China’s once gang-buster economy has lost much of its lustre in recent years.
What is also clear is that the scale of deceleration in China is one of the three keys to global economic growth in 2013. The other two are the efficacy of eurozone crisis management, and the fiscal and monetary policy in the US, especially the so-called fiscal cliff which has so far merely been delayed until a later date for resolution.
Ironically, the World Bank recently revised its predictions for China’s and developing East Asia’s economic growth in 2013, predicting an 8.4% GDP increase. “For 2013, we expect the region to benefit from continued domestic demand and a mild global recovery that would nudge the contribution of net exports to growth back into positive territory, a trend predicted to continue into 2014,” the Bank said in its latest East Asia and Pacific Economic update.
Data gathered by Carlyle is consistent with a somewhat greater decline, however. Thomas says that while China is certainly predicted to see GDP growth at a rate surpassing other principal Asian economies it still represents “a 35% drop in incremental output relative to recent years.”
With regard to industrial production overall, data from Carlyle shows that China has seen a decline; from a high of 18% in May 2010 to 14% in May 2011, 10% in May 2012 and the predicted 6.5% to close out 2012.
In the area of retail sales, it is an equally telling story for China. From a high of 24% annual growth in September 2010, that rate has dropped to 17% in September 2011, and to 9.9% in September 2012, according to Carlyle’s research.
The October 2012 International Money Fund ‘s (IMF) ‘World Economic Outlook’ forecasts a similar deceleration in other developing and emerging economies, such as Brazil, India and Russia. Overall, incremental output is expected to be about 25-30% less than in 2004-2008. However, the emerging and developing market’ share of world GDP growth continues to grow appreciably as growth in the advanced economies simultaneously slows.
The deceleration in China is impacting many other Asian economies, Thomas notes, as the demand for industrial inputs slows. For example, prices of commodities and the profitability of mineral extraction programmes are adversely impacted by the deceleration of growth. Still, at a 9% nominal growth rate and 3% CA surplus, China will generate nearly US$500bn per year in additional final sales, a huge contribution to global GDP growth.
So how does China’s rate of GDP growth compare with other key Asia Pacific economies? According to Carlyle’s data:
- In Singapore, the GDP growth trend has been steady at 5% since 2001 and that rate is also expected to remain stable in 2013.
- GDP growth in South Korea has been steady at 4% since 2001, and that rate is expected to continue in 2013.
- In Japan, GDP growth has declined to approximately 1% since 1997, and that rate is expected to continue in 2013.
Why the poor performance in Japan’s economy? In a word: debt.
“Thanks, in part, to a zero interest rate policy, Japan now has a gross public debt of more than 200% of GDP,” Thomas says. “Had rates been more consistent with historic experience, the annual interest expense would have been too great to accumulate such an enormous debt load and fiscal consolidation would have occurred much sooner.”
By making budget deficits easier to finance in Japan, Thomas says monetary policy would increase the size of ultimate fiscal adjustment costs – the present value of the future tax increases and spending reductions necessary to balance the budget and stabilise debt ratios.
“The Bank of Japan (BoJ) has been waiting 15 years for spending patterns in the Japanese economy to normalise so that they can remove extreme monetary policy accommodation,” Thomas says. It is perhaps precisely because of monetary accommodation that the economy has not normalised.
As a result companies and households know there will be very large tax increases and/or spending cuts at some point in the future, but they don’t know who specifically is going to bear them or what form they will take.
“Decision makers have been rationally responding to this uncertainty by delaying investments, new hires, and other spending,” Thomas explains. “Indeed, plausible levels of risk aversion could cause households and business managers to reduce current spending and investment by more than if the tax increases and/or spending cuts had already taken effect.”
Thomas concludes: “Ultra-easy monetary policy allows banks and commercial businesses to refinance themselves, even in case of technical insolvency. The ‘zombie’ borrowers compete with otherwise healthy companies, which reduce pricing power, profits, investments, and productivity growth. Large, insolvent financial institutions work to keep existing borrowers current- sometimes through loans to meet interest expenses -rather than allocating capital to fund new, productive projects.”
- Editor’s Note: This article, which originally appeared in the ‘AFP Exchange’ title, is summarised from a presentation made at the 2012 AFP Annual Conference by Jason Thomas, director of research at the Carlyle Group, in Miami in October last year.
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