Developed Asia Pacific Shows Momentum as Monetary Policies Trickle Through
Developed Asia Pacific economies showed increased resilience as loose monetary policies of the past two years helped create demand, boost employment, and increase output.
Two key developed economies in southern Asia Pacific, Australia and New Zealand, responded encouragingly to the serial interest rate cuts of the past two years. As monetary authorities pared down interest rates in these countries, housing markets bloomed, construction spending surged, and consumer and business confidence climbed. In Australia’s case, a much needed rebalancing from the export-oriented mining industry towards domestic sectors such as manufacturing and tourism was achieved as lower interest rates engineered a fall in the Australia dollar. In New Zealand, however, an export surge in the dairy sector, in tandem with a recovery in domestic sectors, helped the economy.
Another country that witnessed looser monetary policy was Japan. While an ultra-loose monetary policy helped stoke inflation in the industrialized island, its fiscal policy threatened to sap the momentum at least temporarily. A sales tax hike in Japan after 17 years is largely expected to play a spoilsport frustrating consumers. Economists predict a contraction in output in Japan for the April to June 2014 quarterly period. Disappointingly though, Japan’s inflation is yet to initiate a rise in pay for its productive workforce.
The advanced trading outposts of Asia, Hong Kong and Singapore, however did well on a rebound in regional trade during the final quarter of 2013. A jump in manufacturing, services and exports helped both Hong Kong and Singapore in 2014.
At a Glance
Japan: Japan’s economy braced itself for a rise in sales taxes. As consumer confidence took a hit and household spending tumbled, Japan’s output is largely forecast to experience a one-off contraction during the April-June 2014 quarter.
Australia: The much-expected rebalancing of the Australian economy towards consumption and manufacturing and a bit away from the mining sector, is helping arrest job losses. Australia’s central bank is largely expected to take a tougher monetary stance by the end of 2014.
Hong Kong: Hong Kong’s response to its disgruntled consumers has led to a splurge on welfare spending, translating into a 50 percent jump in social spending. Nonetheless rising inflation continues to trouble the financial center.
New Zealand: A strong showing by both New Zealand’s agriculture and manufacturing sectors is predicted to help the country post strong growth in 2014. However, worried about overheating, New Zealand’s central bank raised interest rates for the first time in three years in March 2014.
Singapore: A fast-growing 2013 marked by strong trade and low unemployment levels added to Singapore’s growth momentum. For 2014, though, Singapore is worried that a shortage in the labor market will affect growth prospects. The city state forecast growth figures of 2 percent to 4 percent for 2014.
JAPAN: BRACING FOR A RISE IN SALES TAX
Japan may be emptying its share of the government coffers for 2014 a tad too fast.
Well, when Japanese consumers are not willing to empty their wallets, the Japanese government does not seem to have any other option but to spend quickly to limit the damage to the economy.
The Japanese government, burdened by a mountain of debt measuring over 240 percent of GDP and a greying population, resorted to a sales tax hike beginning April 1, 2014 to balance its fiscal accounts. The hike in sales tax was aimed at bulking up Japan’s revenues and managing the country’s debt load. The three percentage point hike in sales tax from 5 percent to 8 percent was the first increase in 17 years. After the prior sales tax hike, spooked consumers curtailed their spending and sent the economy into a recession. History is threatening to repeat itself. Now, just as in 1997, consumers seem to despise an increased sales tax.
With consumers refusing to loosen their purse strings, economists surveyed by Bloomberg have forecast an economic contraction for the quarter ending June 2014. Nonetheless, the Japanese government is moving in fast to soften the blow as much as it can, stepping up spending to compensate for the reluctance of its consumers to spend. With this, Japan currently plans to use up 60 percent of its annual budget during the first half of the fiscal year 2014.
But the sales tax hike might not be the only burden holding back Japan’s consumers. Japan watchers opine that Japanese consumers are also likely to feel the heat of rising prices. Painstakingly engineered by dollops of fiscal stimulus and an ultra-loose monetary policy, Japan’s inflation showed signs of picking up in 2014. However wage growth has been too slow to match inflation, affecting consumer confidence.
On the other hand, both investment and net exports too are in a stupor. Japanese companies seem more willing to invest outside Japan rather than at home. As a result, capital investment is likely to inch up a meager 0.1 percent in 2014 compared to 3.9 percent in 2013. Most Japanese firms that borrowed funds have showed a propensity to acquire firms outside Japan. Given this scenario, Japan’s GDP is expected to contract 3.5 percent in the period between April and June 2014, although it is expected to gain some lost ground in the subsequent quarters of 2014.
AUSTRALIA: HOUSING AND CONSUMPTION SHOW MORE SIGNS OF VIGOR
Slowly but steadily Australia’s mining engine is handing over the economic mantle to other sectors in the country. For Australians worried about job and growth prospects, that’s a heartening development. For a good part of the last decade Australia’s mining industry, riding on exports to fast-growing China, not only raced ahead of other sectors but also stomped over them sucking in precious resources such as manpower. A key by-product of mining investments, a stronger Australian dollar, was particularly unfavorable to the country’s manufacturing and consumer spending.
But since the second half of 2013, the tables have slowly turned against the Australia’s resources sector. The sector’s main patron, China, is not growing as fast as it once used to. Secondly, investment growth too has slowed in the sector. Worries over how other sectors will smoothly take over from the mining sector prompted Australia’s central bank to lower interest rates drastically. The rate cutting spree that started in late 2011 ended only in mid-2013.
As of the first quarter of 2014, the Australian economy sent out signals that it was responding quite well to the central bank’s monetary medicine. Firstly, lower interest rates brought down the strength of the Australian dollar against the U.S. dollar, improving the nation’s trade competitiveness, reflected in the slowdown in the pace of jobs lost. In fact, Australia was seen to be adding jobs at its fastest pace in 22 years in February 2014. Further, the lower interest rates initiated a wave of new residential construction projects and now Australian house prices are on a roll. The improved business confidence was also reflected in upbeat hiring by the country’s retail segment.
Consumers too are putting their weight behind the Australian economy by showing increasing willingness to spend. In fact, the Australian savings rate declined below 9.7 percent in the final three months of 2013, the first fall below the 10 percent mark in nearly three years.
All these factors have turned the attention towards Australia’s central bank once again. Economists polled by Bloomberg are predicting a marked shift in the monetary stance, citing a tighter monetary policy beginning in late 2014.
HONG KONG: SOCIAL SPENDING AND INFLATION FIGURES JUMP
In Hong Kong, security guards who keep vigil over the city’s skyscrapers, went on a protest in early 2014. The reason: the city’s inflation has been eating into their pay so much that they claim their 2013 compensation was even lower than the previous year in real terms.
Inflation has been hitting the financial center over the past few years. Booming rentals and imported inflation has been troubling Hong Kong over the past five years. In 2012 and 2013, inflation jumped by 4.8 percent and 4.5 percent, respectively. The price of everyday items such as tobacco and meat has skyrocketed over the past many years, generating disgruntlement among the citizens of Hong Kong. Meanwhile, the arrival of wealthy Chinese also crowded the country’s property markets sending prices for apartments soaring.
Mainly to address such frustrations, Hong Kong’s government boosted welfare spending especially aimed at the country’s pensioners and healthcare system. While on the one hand the social spending alleviated some of the pressures on living standards, Hong Kong’s social spending too has skyrocketed many fold. Consequently, the city’s surplus dropped significantly in 2013 compared to 2012.
There was a silver lining though. Robust spending helped Hong Kong post 2.9 percent GDP growth in 2013. Hong Kong’s government expects growth of 3 percent to 4 percent, the fastest pace in two years, and consumer price inflation of 4.6 percent in 2014.
NEW ZEALAND: CENTRAL BANK TAKES CONTROL OF MONETARY TOOLS
New Zealand’s monetary policy signaled its long shift towards tightening with a 25 basis point hike in its official cash rate by the Reserve Bank of New Zealand at its March 2014 meeting. From now on the pace of tightening in the Pacific island is expected to progress at full steam, according to a poll of economists by Bloomberg.
That’s no surprise. New Zealand’s economy, after being hit by natural calamities and other problems since 2011, slowly gathered momentum over the past couple of years and has shown signs of a full-blown recovery since late 2013. Naturally, the country’s central bank seems to want a firm grasp of interest rates should the economy overheat in the year ahead. Consensus estimates predict multiple interest rate hikes over the next two years to keep inflation under control on the island.
New Zealand is expected to witness well-rounded growth in the quarters ahead. While rural pastoral farmlands are churning out an export boom selling dairy and meat products to China, reconstruction spending in the island’s second largest city of Christchurch is spearheading urban growth. Capital spending and manufacturing coupled with a ‘job hunter’s’ market too are expected to keep the going strong for New Zealand in 2014.
Consequently, the Pacific island’s GDP growth forecast of 3.4 percent is largely expected to outstrip that of its developed peers in 2014.
SINGAPORE: CHRONIC SHORTAGE OF LABOR THREATENS A REPEAT OF 2013
Singapore’s economy posted exceptionally strong performance during the fourth quarter of 2013. Manufacturing growth zoomed, the services sector jumped and construction spending inched up to contribute to the city state’s growth in the December quarter.
Resurging trade in the region was also another reason that Singapore’s annual growth was clocked at 4.1 percent in 2013. Singapore expressed confidence that its underlying growth trend benefitted from an improvement in global conditions. Nonetheless, the city-state’s officials added a word of caution saying that “the recovery will also be bumpy.”
Furthermore, despite lower inflation, Singapore’s monetary regime stuck to its commitment to a gradual appreciation of its currency primarily to manage price gains through 2014. The commitment for a stronger Singapore dollar comes amidst lower inflation and a slight improvement in growth. Unemployment figures – a five-year low of 1.8 percent in the final quarter of 2014 – in particular have Singapore’s monetary officials concerned over price gains.
To address the country’s chronic shortage in labor market, Singapore’s government has vowed to improve labor productivity rather than let in more foreign immigrants. Recent protests by citizens opposed to more immigration have stolen some of Singapore’s political will to issue additional immigrant permits to workers from neighboring countries. Singapore’s trade ministry however warned that “tightness in labor conditions could weigh on growth in some labor-intensive sectors.”
Singapore forecast growth to range between 2 percent and 4 percent in the year ahead.
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