Asia Showing A V-Shaped Recovery
Some emerging Asian economies posted robust growth in Q2 2009 after contracting or slowing sharply in Q4 2008 and Q1 2009. Aggressive fiscal and monetary stimulus, improving credit market conditions and positive wealth effects from rising asset markets have revived domestic demand. Lower leverage and better macroeconomic fundamentals are also a plus.
- China and India grew 7.9% y/y and 6.1% y/y respectively in Q2 2009, accelerated from 6.1% and 5.8% respectively in Q1 2009.
- Both Singapore and Taiwan grew over 20% q/q (seasonally adjusted). South Korea and HK grew 2.3% and 3.3% (sa) respectively. However, all tiger economies saw GDP contractions on a y/y basis.
- ASEAN: Indonesia's growth decelerated to 4.0% y/y in Q2 2009 from 4.4% in Q1, while Vietnam's growth accelerated to 4.5% y/y in Q2 2009 from 3.1% in Q1. Both Thailand and Malaysia posted positive quarterly growth in Q2 2009, with GDP contraction easing to 4.9% y/y and 3.9% y/y respectively from 7.1% and 6.2% respectively in Q1.
- Backed by aggressive fiscal and monetary easing policies, China and Indonesia have led the region's recovery, whereas Malaysia and Vietnam have lagged. While China introduced the most aggressive stimulus package, South Korea, Singapore, Malaysia, Taiwan and Thailand implemented fiscal stimulus packages that are at lease 4% of GDP. South Korea, India, Indonesia and China will lead the region in policy tightening in H1 2009.
- In February and March 2009, the pace of export contraction eased. But since Q2 2009, the pace of export contraction has been volatile, first accelerating and then decelerating in most countries. Demand from Chinese fiscal stimulus has not been strong enough to offset weak demand from G3 countries (though commodity exporters have enjoyed some benefits), but exports to the G3 have started to turn the corner. Export contraction is still sharp in most countries in the region, exceeding 20% y/y as of June 2009. Singapore and Hong Kong have shown some stabilizing indications, with exports now falling in single digits.
- Since March 2009, manufacturing activity has rebounded sharply, with the purchasing managers' index (PMI) rising above 50 for China, India and Singapore. In Q2 2009, industrial production surged 40% annualized and has recovered 65% of the ground lost since late 2008. Nonetheless, as of June 2009, industrial production was still falling about 10% y/y in Singapore, South Korea and Taiwan. Industrial production for Vietnam grew at an accelerating pace in Q2.
- Foreign direct investment (FDI) inflows are contracting. China and India have experienced over 20% y/y contraction in Q1 2009. Cutbacks in capex will hit economies highly dependent on FDI inflows, including Singapore, Malaysia, Thailand and Vietnam. In Q1, gross fixed capital formation contracted sharply in Singapore, Taiwan, Thailand and the Philippines, while that in Indonesia grew, though at a decelerating pace.
- Domestic consumption is weak due to strong ties of exports to investment and consumer spending. Aggressive fiscal spending is a plus, but increasing job losses, slowing income growth and negative wealth effects from 2008's asset market correction will weigh on the region's consumption. Starting in Q2 2009, private consumption has picked up in China, India, Indonesia and Vietnam, while it continues to contract in Hong Kong and Singapore.
- Though the pace of job losses has slowed in Asia in Q1 2009, the unemployment rate is likely to increase further to 5.1%-5.9% in 2009, up from 4.6% in 2007. The unemployment rates for Indonesia and the Philippines are among the highest in the region. Youth unemployment is a significant concern in Thailand and South Korea. China and Vietnam face the risk of social unrest from job losses among migrant and factory workers.
- The decline in resource utilization, increased excess capacity and lower oil and commodity prices compared to 2008 have caused deflationary pressures in the region. Consumer prices are falling in China, Malaysia, HK, Singapore, Taiwan and Thailand. But 2008's base effects might start fading in Q3 2009, leading to slower deflation or even inflation risks, which are emerging in China, India and South Korea. Capital inflows and asset market rallies might be fueling asset inflation.
- Commodity exporters like Malaysia, Indonesia and Vietnam have been hit by commodity correction, while the Asian Tigers and India have benefited. Rising oil and commodity prices since since February 2009 might be a risk for some countries.
- Domestic liquidity, capital inflows and diminished risk-aversion have boosted Asian equity markets since March 2009. However, the impact of slower sales on corporate earnings and external factors might pose risks to capital inflows.
- In 2009, Asian equity markets (excluding Japan's) have outperformed mature markets and are up 47.7% year to date as of August 6, 2009. Valuations and improving growth prospects are pluses for some countries, while capital inflows and market rallies might be making valuations expensive in some countries.
- Since March 2009, all major Asian currencies have been on an appreciation path, buoyed by capital inflows, improving trade balances, firmer signs of the bottoming of the industrial cycle and an overall bearish market view on the U.S. dollar.
- To achieve potential long term growth, export-dependent Asia needs a revival of external demand in G3 countries. Also, the drivers of growth need to come more from domestic demand by boosting private consumption and investment. Strengthening social safety nets and encouraging more labor-intensive services are necessary.
- The sharp contraction in Asian exports has moderated, helped by easy macro policies. Sound fundamentals are attracting large capital inflows. However, the recovery is still fragile due to high unemployment and overcapacity and risks of a double-dip in advanced economies and an exodus of foreign capital.
- The drop in both industrial production and exports was due more to 'one-off' and other temporary factors, and...the upturn is mainly a result of those factors fading from the picture. Asia's supply side is surging back in V-shaped fashion, and the region's exports are climbing strongly, thanks to improved demand from China.
- ASEAN countries, especially Indonesia and Vietnam, that can serve China's domestic demand for commodities will likely see a swifter cyclical recovery.
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p/s photos: Fiona Sit Hoi Kei