Not very many economists forecast last year’s strong recovery in Asia, but almost everyone now sees a robust year for the region, despite the rocky problems in Greece, Ireland, Portugal and other economies in the European periphery.
Economic Forecast: A Bull in the Asia Shop
Among the most bullish is Rajiv Biswas, Asia Chief Economist at IHS Global Insight, a New York-listed economic and financial information services provider. He has raised his growth forecast for the U.S. to 3.2% after corporate tax cuts were extended and expects China to expand 9.5%.
“Even when we look into 2012, we also expect growth to remain quite strong in emerging Asia.” Biswas told CFO Innovation’s Cesar Bacani. Below is Part 1 of the interview, in which Biswas explains why he is particularly optimistic on China and the U.S. Part 2 of the interview, on regional and global risks, will be published separately.
The U.S. unemployment numbers and other economic indicators are looking a bit better, and that’s good for Asia, right?
Absolutely. I think the key turning point was in December, when President Obama signed into law the tax cut package in the U.S. This was actually a very important factor changing the outlook for U.S. economic growth in 2011. We at IHS Global Insight forecast that this will result in U.S. GDP growth increasing to 3.2% in 2011. Prior to the tax cut package, the consensus was considerably lower.
Definitely over 3% growth for the U.S. represents a very good underpinning for the global outlook. The second important positive point is that we also expect that China will continue to grow strongly in 2011. We’re forecasting growth of 9.5% in 2011 for China. Given these are the two biggest economies in the world, the combination of these two stories means that it’s quite an important boost for the outlook for the Asia Pacific, particularly because most of the largest East Asian countries are such large export sectors.
Overall, we expect this environment will be very supportive for the emerging economies both in Northeast Asia and in ASEAN. China is South Korea’s biggest trading partner, for example, so the very strong growth continuing in China plus the stronger growth in the U.S. is very supportive for South Korean exports this year. Growth rate in Taiwan will be pushed up as well, and of course in Hong Kong.
How about India?
We expect strong growth to also continue in 2011 in India. We’re forecasting growth of 8.3%. What this means overall for emerging Asia is that we will see a second strong year of growth, at about 7.1%, compared with 8.2% in 2010. Given there was such a strong rebound in emerging Asia last year, over 7% [in 2011] is a very favourable story for the Asian economies.
Even when we look into 2012, we also expect growth to remain quite strong in emerging Asia, at about 7.2% because the drivers are still going to be in place. We expect the U.S. economy to actually continue its momentum into 2012. Importantly, we also expect China to still be growing quite strongly in 2012 and also India. So overall all the drivers for the region are still in place in 2012.
No double-dip recession, then?
The risk of a double-dip recession has abated considerably in 2011. Many corporates in Asia were extremely worried about that scenario in the middle of last year. This has abated a lot and what that means is that corporate spending plans will change. A lot of CEOs of multinationals and CFOs were very conservative in their positioning. They were conserving their cash even though they had such strong cash flows last year.
Now they economic growth in Asia continuing and the U.S. outlook is looking better. It means there will be more corporate spending. This is definitely what we expect in the U.S., that corporates will be starting to spend more into 2011, and also in Asia Pacific. This is very much the sort of story that make multinationals feel more confident to start moving ahead with their investment plans.
When you talk about emerging Asia, that would be Asia ex-Japan, ex-Australia?
Yes. Australia right now is going through some difficulties because of the flooding [in Queensland]. But generally they’ve also been a participant in the Asia recovery last year because of the resource sector. They came through very well through the global financial crisis because of their strong links with China. We do expect growth to continue also in Australia albeit in a not such high rates as emerging Asia, since they are a developed country.
Overall, the Asia story is very supportive for the commodities outlook in the medium term for Australia. But we will see difficulties through this year in the first couple of quarters in Australia because of the floods. Rebuilding will boost the second half of the year.
GROWTH IN AMERICA
What are the drivers behind your optimism on the U.S. economy? Since consumer spending accounts for 70% of the economy, it seems overly optimistic to forecast 3.2% growth when unemployment is still very high.
There’s going to be a number of drivers for the U.S. economy. We saw a weaker USD for some time now and this is helping exports to grow. But given that the export sector has a relatively small share of the economy, this is only one factor.
Another factor is the corporate investment story. We expect corporate spending to pick up and private investment to be stronger. We also expect housing will no longer detract from growth by the middle of the year. The sector won’t add much [growth], but it won’t at least be a drag on economic growth.
The consumer has been getting somewhat more confident. We do see better numbers in the fourth quarter for consumption in the United States. November and December was a crucial period because not only did they have Christmas and New Year, they also had the Thanksgiving holiday, which is quite an important indicator of consumer sentiment. Overall we estimate that holiday retail sales are up about 5% this year compared to last year, which is the strongest since 2005.
I don’t want to overstate it, because I do agree with you that high unemployment and household balance sheet deleveraging are still factors that will be a drag on the U.S. consumer. But nevertheless a slightly better momentum in the consumer sector will also be helpful for the overall growth picture this year, given that consumption is 70% of the economy. We saw consumer growth consistently throughout most of 2010 and also more confidence about the economic outlook. These factors will help support actual consumer spending
What will be the driver for U.S. corporate spending?
It will be on plant equipment and software replacement. During the global financial crisis, corporates became very tight on their plant and equipment spending. The software replacement cycle is also much shorter cycle than for factories, and this also was heavily constrained. They’re behind the curve on spending; they’ve held back for several years already.
Now that they have built up their cash reserves and they see growth outlook this year is good and also going into next year, they really need to start spending on things like IT equipment, replacement cycle, and also on some of their other plans for more plant and equipment investment, retooling and so on. All of these things will be contributing to higher corporate investment in the U.S. this year.
Does this mean the US will be importing more from Asia?
Certainly. The U.S. is still a very important market for Asian companies. In terms of momentum, China’s still going to [account for] the biggest incremental growth rate – we’ve seen such rapid growth in Asian exports to China, which we think we’d see continuing because China will still be growing strongly. But the U.S. is still the world’s largest economy and an over 3% GDP growth rate will mean continued positive growth in Asian exports into the U.S. market.
What kind of exports are we talking about here? Toys and clothes, electronics?
What people sell depends on the country. Some of it is still low-end manufacturing, but some is very sophisticated. The electronics industry is very large in South Korea, Taiwan, also in Southeast Asia, Thailand, Malaysia, Singapore, Philippines also. If you look at a country like India, it’s quite sophisticated value-added services such as IT outsourcing.
Will the U.S. be buying more steel and other commodities to refurbish factories?
China is now the biggest oil market in the world. We’re seeing a very big shift in the global economy; the balance of economic power is gradually shifting towards Asia. That means Asia is a driver for commodity demand and is underpinning a lot of the growth we’ve seen in demand, for oil, for coal, and other commodities as well including food. If we look over the medium term, generally what we’re seeing in Asia is more consumer spending by the middle class, which is driving demand for agricultural commodities as well.
GROWTH IN CHINA
Is there a chance that China will start withdrawing its huge stimulus package and cut down on government spending?
On the margins they probably will do that because they don’t need [the stimulus spending] – they’re growing by over 9%. It was never that large, to be honest, it was just less than over 2% of GDP, which is very low. But I think they will still trim it.
This doesn’t mean that the infrastructure momentum will stop, though, because it’s a key long-term strategy of the Chinese government to build up their western provinces. These plans are high-speed rail networks for highways to connect the inland provinces with the coastal provinces. This is a long-term strategy and a lot of money will go into infrastructure and urban development to create housing for the people in inland regions. We are going to see many years of rapid infrastructure development continuing especially in the western provinces.
The key drivers in 2011 in China would still be exports, government spending on infrastructure and social safety nets, and then the third leg would be consumer spending?
Yes, we enter the year with most engines going quite strongly, when you look across the board at China right now. Retail sales are growing at about 18% year-on-year at the moment. Urban fixed investment is growing at about 25% year-on-year. Industrial production, the latest numbers are showing growth of about 13% and the export sector has rebounded as well; it’s growing at about 18% year-on-year at the end of 2010.
The concern in China right now is inflation, but even then, it’s not a runaway inflation. There’s some increase but it’s not so extreme and we don’t think it’s going to need very significant tightening [in monetary policy]. There will be some further tightening, but not so significant that it’s going to derail the economic growth story.
But bank lending last year overshot the target and 2011 probably will be no different. Won’t the flood of credit stoke runaway inflation?
We have seen very rapid expansion in credit in 2009, especially. Last year’s expansion was around 20% in China, and I don’t think this year it will be much [lower]. But if you see an economy growing at roughly 10%, the rate of credit expansion you need in order to accommodate such rapid growth has to be in the range of 15%, 16%. So they’re probably going to be looking for that kind of target, somewhat less than in 2010, but not a very significant reduction.
That doesn’t mean we can be complacent. There are vulnerabilities because of this rapid expansion in credit, particularly for the banks, which have lent so rapidly in the last two years. There’s a lot of hidden risks in the new lending they have done, especially to the corporate sector and to local governments. They may not be coming to the surface immediately – we know the economy is growing at 9.5% and interest rates are still quite low – but down the road I think it does mean that non-performing loans in the Chinese banks will be increasing.
This is why they are already raising capital. Last year we saw the big banks scrambling to raise capital in markets with new issuances and so on. I think they are starting to take action to try and position for [rising non-performing loans]. Still, there is a comfort zone in the economy’s strong growth and the government’s very massive reserves. Foreign exchange reserves are now US$2.9 trillion, so should there be problems, the government still has the ability to handle them.
Local governments also did a lot of borrowing [in the last two years]. The question is: How do they pay it back? Again, as long as the economy is still growing, the construction sector is still growing, demand for housing, land is still strong, then these issues will not come to the forefront. But there are vulnerabilities below the surface in China, which the government is trying to manage.
Is the Chinese government up to the task? How do you assess the quality of China’s government management?
If you look at their macro-economic management over the last 20 years, you’ve seen a pretty good story. They have managed a lot of difficult times, ranging from the East Asian crisis to now the global financial crisis. They have come through all of those without having recessions. They have shown much improved macro-economic management skills as time has gone by.
Certainly over the last 20 years, the credibility of their macro-economic management, the depth of their bureaucracy and skills in the central bank, in the Ministry of Finance, and the government think-tanks, it’s very strong now. You’ve got a lot of very capable economists.
But they still use administrative measures to control bank lending, so to some degree they still blunt instruments. These administrative controls don’t always work very well, as we have seen in the last two years. There has been a gradual improvement, though.
Another area where they have been significantly trying to raise their standards is the risk management in the banking sector. Over the last decade, since they have problems ten years ago, where they have a lot of very high NPLs in the banking sector, they really embarked on a campaign to try to build risk management systems in the banking sector.
This is a gradual process that’s been taking place. It’s not final yet. But they have certainly made a lot of progress. As I say, we’re going to see rising NPLs taking place now because of the very rapid lending over the last two years. But I also recognise that they have made significant steps in this direction to try and put in place risk management systems and also to develop these over time.
What about the structure of the Chinese economy? Are the drivers more balanced now and not overly weighted toward exports?
The share of domestic consumption in GDP isn’t much more than about 30%, and this is something that has trended down over the years. If you go back to the 1970s, consumption was much higher as a share of GDP.
The key drivers of Chinese economic growth were exports and investment. However, I think we’re reaching a turning point. If you look at private consumption as a share of GDP, it’s starting to turn. What we’re going to see in the future is some gradual rebalancing, a gradual increase in the share of private consumption and GDP.
One reason is that we’re seeing strong growth in consumer demand right now. The structure of Chinese society is also changing. We’re seeing rapid growth in incomes and the rise of the middle class. They’re reaching the per capita GDP levels at which the savings rate will start to decline and the share of consumption will be rising. For example, if you look at Japan or South Korea or Taiwan, when they reached a certain threshold, say about US$5,000 per head, then they spent more in consumption.
We’re also seeing government initiatives to try and support consumption [by creating] social safety nets and higher health care spending. Traditionally rural households didn’t have much access to health care and precautionary savings were very high. Now there’s a big rollout taking place in the health care sector. Gradually over the next decade, that precautionary savings motive may decline.
You have some bearish investors, though, such as Jim Chanos, that are betting against China. What they say is that it’s Dubai times 1,000, because all those bank loans have gone into apartments and other assets that no one is living in or using.
I don’t agree with that at all. Dubai was a very artificial market where you had a very small population and massive speculative building. There was so much over-supply of property. China’s a very different situation, where you have the world’s largest population. There’s a huge demand for better housing, and so I think over the next 20 years there’s a lot of need for new housing construction to meet the needs of population.
And it’s not concentrated in one place. This is a question of many different cities across China, tier one, tier two, tier three cities; in all those cities, you need various degrees of increased housing provisions. Of course there can be situations where there’s over-supply, in particular smaller cities where there’s been all of speculative building and so on. There could be some pockets of such problems from time to time in China.
But this is very different to Dubai, where you don’t have a population of local people to match the construction going on. In Dubai it was a question of speculators, builders who were hoping that a lot of foreigners would buy into it and now of course that bubble’s completely collapsed. Whereas in China you do have a very underlying strong demand and that growth is still continuing strongly.
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