Recovery & risk: Asian economic prospects in 2014
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Recovery & risk: Asian economic
prospects
in 2014
Telstra/Asia House
Asia Business Champions
June 2014
Dr Simon Baptist
Chief Economist
0
5,000
10,000
15,000
20,000
25,000
30,000
China
US
India
Japan
ASEAN
Germany
Brazil
Russia
UK
Mexico
France
Korea
2007
2020
GDP, purchasing power parity; 2005$US bn. Source: The Economist Intelligence Unit.
Global economic heft is shifting
Three big themes for 2014 and beyond
Synchronised upturn in the major developed economies
US recovery is deepening; broad based
Europe is growing, though fitfully
Japan: Abenomics helping, but no panacea
Tighter financial conditions globally
It’s all about the Fed; less liquidity
Will capital flight destabilise developing
economies? Is there risk of an EM crisis?
Back to basics in emerging markets
China, India, Brazil, etc: reforming, resetting and rebalancing
Asia economic forecast
China is still one of Asia’s fastest growing economies
GDP growth 2014-18 average % pa. Source: The Economist Intelligence Unit.
0
1
2
3
4
5
6
7
8
9
PG KH MM LK CN VN IN ID PH BD MY SG TH KR PK TW AU NZ HK JP
But China is slowing, and India and Indonesia are speeding up
Most new Asian economic activity will be in China and
India
Additional GDP 2014-2018, nominal US$. Source: The Economist Intelligence Unit.
0
1,000
2,000
3,000
4,000
5,000
6,000
CN IN ID JP KR AU TH MY PH SG
Indonesia, South Korea and Thailand are also EMs to watch
Many Asian economies are passing the consumption
tipping point of US$3-5,000 per person
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
TW MY CN TH ID LK PH PG VN IN
Consumption per person 2018, nominal US$. Source: The Economist Intelligence Unit.
Big Asian economies are becoming middle income
10
15
20
25
30
35
40
45
50
55
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
2065
2070
2075
2080
2085
2090
2095
China India Japan Germany US World
Asia has some of the world’s oldest and youngest countries
Source: UN World Population Prospects; Haver Analytics
Median age
India is an exceptionally
young country!!!
China
National Bureau of Statistics and Economist Intelligence Unit
China: Slowing but setting a better foundation
Income over Rmb40,000
• Despite the slowdown, we
expect 7.3% growth in 2014
• Still very fast expansion for a
US$10trn economy
• Government looking to set
foundation for solid growth;
away from “bubble” economy
• Rising incomes supporting
consumer spending
But a new era has started;
growth will average 6.5% over
the next few years
Income over Rmb25,000
Wages in China are also rising rapidly:
this is having have big implications
Source: The Economist Intelligence Unit
BR
CN
DE
IN
MX
ZA
TR
US
100
150
200
250
2006 2008 2010 2012Year
Nom
inal w
age in
dex, lo
cal c
urr
ency, 2005=
100
Go west: China is not a single story
• Wages in Shanghai
are approaching
those of some OECD
countries
• Wages differ
between provinces
by up to a factor of
2.5
• Competition for
migrants between
cities is increasing
• Western and central
provinces are
cheaper, but logistics
are more challenging
Source: The Economist Intelligence Unit
Guangdong
Henan
Shanghai
Sichuan
Tianjin
60000
90000
120000
2013 2014 2015 2016 2017 2018Year
Nom
inal w
ages, R
MB
per
year
China’s cities are coming into focus
But the transition from an investment- and export-led economy will entail lower
growth, and this will not be easy to manage
Dongguan
Erdos
Guangzhou Hefei
Luzhou, Sichuan
Qitaihe, HLJ
Shijiazhuang
Taiyuan
10
20
30
40
50
60
70
80
90
100
20 30 40 50 60 70 80 90 100 110
Urb
an
isati
on
rate
(%
)
Per head consumption ('000)
Urbanisation and consumption, 2030
Source: The Economist Intelligence Unit
China challenges consensus on politics and development
• The growth rate in China, with strong government control, has been amongst
the fastest in the world
• Chinese firms have faced resistance due to perceptions of being too close to
the government
• Governments in Africa, Latin America and the rest of Asia have used the
Chinese example to rebuff calls for greater democracy or openness
BUT
• Will innovation and creativity, needed once catch-up growth phase ends, be
possible without such freedoms?
• Greater demands from the middle classes for opportunities and freedom have
led to social unrest in other countries; can China buck the trend?
Chinese firms are also investing record amounts overseas
Chinese outward FDI will top US$200bn in 2018
Japan
Japan: No surge in sight, but better outlook
-20
-15
-10
-5
0
5
10
20
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- Q1
20
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- Q2
20
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- Q3
20
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- Q4
20
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- Q1
20
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- Q2
20
13
- Q3
20
13
- Q4
20
14
- Q1
-8
-6
-4
-2
0
2
4
6
8
10
12Tankan business sentiment
Fixed capital investment
• “Abenomics”—fiscal stimulus,
structural reforms, money-printing
Twice as much easing as the US
Fed, as share of GDP
• Outlook has improved
Stronger business investment;
three quarters of +8-9% growth
• Inflation is back
• Consumption tax hike will hit
consumer confidence
• Population, workforce will contract
• Outlook? Not rapid growth, but
sustained, moderate growth
• Nationalism a worry
Tankan: diffusion index. Gross fixed capital formation, % change, annual rate.
Source: Tankan business survey, all enterprises; Cabinet office for investment
India
India: Slower growth, high inflation…but plenty of upside
• India’s economy soared between
2004-2010
Powered by foreign investment
But deep problems—politics, poor
infrastructure, over-regulation,
labour issues—never addressed
• Bubble economy led to high inflation,
rising debt, slow growth
• On the road back
Better economic management
Still-young population; education?
Politics is still disruptive, divisive
• Watch Indonesia for a similar story
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GDP Inflation
Real GDP, % change; Consumer price index (CPI), % change
YoY. Source: National government, Economist Intelligence Unit
ASEAN
ASEAN is set to become a major economic power
The economy of the ASEAN-6 will be as big as Germany’s by 2018
Source: The Economist Intelligence Unit
ASEAN consumers are becoming richer
Source: The Economist Intelligence Unit
More people’s income will pass the critical US$5,000 level
Asian business environment
What determines an investor’s location decision?
• Wages in nominal, exchange-rate adjusted terms
• Productivity of workers
• Availability and cost of raw materials
• Business environment
• Logistics, profit repatriation, FDI policy, trade barriers, unions, red tape
• Public relations and corporate social responsibility
• Political stability
• Environmental and natural disaster threat
• Diversification of supply chains
• Proximity to markets
• Balance of skills and cost in each of local and expatriate workforces
The EIU combines all of these into a measure of operational risk….
The business environment in Asia can be challenging
• Operational risk in Asia
can be high,
particularly in
Myanmar
• Investors need to
consider the types of
risk they can
competitively manage
• In some cases the FDI
environment is
different from the
overall business
environment, eg
Vietnam more
welcoming for FDI than
its total score suggests Source: The Economist Intelligence Unit
Asian companies still investing in China, but other markets
are catching up
Source: Economist Corporate Network Asia Business Outlook Survey 2014
India looks good for labour-intensive manufacturers
• India, Philippines,
Peru, Taiwan and
Poland are
becoming more
attractive
compared to
China
• Bangladesh,
Vietnam, Nigeria,
Russia and Brazil
are getting less
attractive
Labour
competitiveness
increasing against
China
Labour
competitiveness
decreasing
against China •Source: Economist Intelligence Unit
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