Developed Asia Pacific
SECOND QUARTER 2012 ECONOMIC REVIEW Economic Review
AT A GLANCE
Japan: Japan’s current account surplus for May shrank to nearly $2.7 billion, the lowest since 1985, on falling machinery orders and rising energy imports.
Australia: To shield the domestic economy from global pressures, the Reserve Bank of Australia cut interest rates by a total of 75 basis points in the second quarter.
New Zealand: The consumer confidence index compiled by ANZ National Bank fell to a low of 105.8 in June from 113.8 in May.
Hong Kong: Hong Kong’s exports recorded a 5.6% and 5.2% growth in April and May, respectively, offsetting weakness in the retail and tourism sectors.
Developed Asian economies turns dull after an upbeat first quarter
Developed Asia Pacific economies experienced significant headwinds during the second quarter of 2012. While optimism about business conditions in the Euro-zone helped sustain export growth during the first quarter of 2012, significant challenges from the Euro-zone hampered both investor and consumer sentiment in most developed Asian economies during the second quarter. Demand for Japan’s high-end export merchandise, Australia’s jobless rates, and Singapore’s inflation have taken a turn for the worse during the second quarter compared to the first quarter. The slowdown in China too is spilling over to many of the exportdriven economies in developed Asia. Hong Kong, in particular, felt the heat of a slowing China acutely. The financial center, which depends on the wallets of mainland Chinese tourists for retail sales, came under pressure as the tourists visiting from the mainland were scarce during the second quarter. In many resource and commodity driven economies such as Australia and New Zealand, unemployment rose as well. While Australia’s dollar continued to hamper the competitiveness of the country’s wine-making and hospitality industries resulting in job losses, New Zealand’s labor market felt the heat of weak investment and consumer sentiment. While inflation inched a bit lower in Hong Kong on the back of a weakening services sector, Singapore’s inflation continued to be elevated due to strong growth in labor wages and high housing and rental costs.
Japan: Second quarter exports face headwinds
Japan’s economy started 2012 on a strong note. The country’s GDP for the first quarter of 2012 expanded robustly on the back of a strong reconstruction spending and a modest rise in consumer spending. The 4.1% growth in GDP in the first quarter exceeded all survey estimates published by Bloomberg by a considerable margin. The rise in GDP came on the back of strong efforts by the country’s central banks to weaken the Japanese currency, the yen, which had hampered the prospects of many Japanese corporations during the whole of 2011. Buoyed by the strong growth during the first quarter, the monetary authority, Bank of Japan, raised its assessment of economy in all the sub-regions within Japan.
However, as the second quarter progressed, prospects for the Japanese economy came under a cloud yet again. The yen, for one, strengthened nearly 5% against the U.S. dollar since mid- March. Economists surveyed by Bloomberg, now opine that consumer spending in the country peaked during the last days of the first quarter of 2012. Amidst recessionary conditions in the Euro-zone, Japanese exports again encountered significant headwinds during the second quarter. For May, Japan’s current account surplus, broadly the difference between exports and imports, shrank to nearly $2.7 billion, the lowest since 1985. Japanese companies, which traditionally cater to the high-end needs of chemical makers and aerospace companies in the international market, have suffered tough economic conditions since the beginning of the second quarter of 2012. On the other hand, Japan’s energy imports in recent times have soared in the wake of closure of nuclear plants. Both these factors contributed to the fall in current account deficit.
In other developments, Japan’s government headed by Prime Minister Yoshihiko Noda is pressing for a hike in the consumption tax to 8% from the current 5%. Japan is trying to pare its government debt, which now stands at 223% of GDP, through consumption taxes. While the higher taxes could help Japan reduce some amount of debt, the tax hike is expected to trim the GDP by 0.32% for every one percentage point increase in tax, according to the Japanese Cabinet Office’s Economic and Social Research Institute.
The Bank of Japan has predicted that Japan’s economy will expand 2.3% for the fiscal year 2012 and that inflation, excluding food prices will rise 0.3% for the year ending March 2013. It expects inflation to rise 0.7% for 2014 against its earlier prediction of a 1% jump during that year.
Australia: Mining investment and rate cuts help economy
Australia’s economy expanded at a strong pace during the first quarter of 2012. Despite bad news from most developed economies, Australia managed to post robust economic numbers on strong support from investment in the mining sector. Further, a set of interest rate cuts from the country’s central bank, the Reserve Bank of Australia, since the second half of 2011, helped improve both investment and consumer confidence. As a result, Australia’s GDP during the first three months of the year expanded 4.3%. The first quarter GDP was mainly powered by strong household spending and the engineering construction segments. Together, these two engines offset a mild setback in the export segment that shrank 1.3% during the quarter.
The strong performance of the Australian economy has been attracting capital inflows at a rapid pace. This has resulted in Australia’s currency, the Australian dollar, scaling record high levels against the U.S. dollar in June. The strong currency, however, has hampered the competitiveness of Australia’s export sector. Major industries such as hospitality, tourism, and wine-making in Australia have come under pressure due to the strong domestic currency.
But since the beginning of the second quarter of 2012, Australia’s domestic economy has showed increasing signs of strain primarily due to uncertainties in the global economy. While the engineering and industrial construction segments have proved resilient, thanks to the booming mining sector, the general construction industry is feeling the heat of increasing uncertainty partially arising from higher unemployment. According to a survey conducted by Bloomberg, Australia’s unemployment in June was predicted to climb as high as 5.2% compared to 5.1% in May. Already the number of job openings advertised by Australian corporations dropped 3.3% in June. The rise in employment is hitting the country’s housing markets though. Australia’s construction index compiled by the Australian Industry Group and Housing Industry Association dipped to an eight-month low of 34.8 in June, indicating a contraction in activity.
The country’s central bank is now actively cutting rates to stimulate the economy, slashing interest rates by a total of 75 basis points in the second quarter. But in its July meeting, the central bank left benchmark interest rates untouched, saying that projected inflation and growth figures were close to target. Australia’s interest rates are currently at a two-and-a-half year low of 3.5%.
On the fiscal side, however, Australia’s Prime Minister Julia Gillard announced that her government will try to balance the country’s budget and bring it to a surplus this year. Australia’s government now expects a budget surplus of A$1.5 billion (USD1.56 billion) for 2012 after four years of deficit. The country’s prime minister added that reducing government spending will give ‘maximum room’ for the central bank to stimulate the economy by paring interest rates further.
Hong Kong: Slowing China reins in tourism and retail sector
Hong Kong’s economy expanded at the slowest pace in nearly two years during the initial months of 2012. A slowdown in mainland China and a loss of investor confidence due to problems in the Euro-zone reined in on the pace of expansion in the financial center. First quarter GDP inched up just 0.4% compared to the fourth quarter 2011 expansion of 3%.
In recent times, the number of Chinese tourists and shoppers visiting Hong Kong has dipped. As the number of Chinese visitors to Hong Kong fell by 100,000 to 2.5 million in May, retail sales growth was hit, dropping to 8.8% in May compared to 11.4% in April.
While services sectors such as tourism and retail sales posted lukewarm growth at best, the manufacturing segment of Hong Kong has been lending a helping hand. Hong Kong’s exports recorded a 5.6% and 5.2% growth in April and May, respectively.
However, despite the strength in the export sector, Hong Kong’s government has revised its growth forecast sharply downward for 2012. The government expects GDP to grow just 3.5% for 2012 compared to 5% growth in 2011 primarily due to the weakness in the country’s financial industry. Meanwhile, some of the challenges in the broader economy started showing up in the form of a slowdown in factory output and lower inflation. Hong Kong’s inflation increased at a much slower pace of 4.7% during the early parts of the second quarter compared to the 5% inflation figure experienced in the first quarter.
What’s more, Hong Kong’s inflation is expected to flare back to the 5% level in the second half of 2012 according to economists from private banks. The HSBC bank in its research note in May said that with demand for housing rising, rents are expected to remain at record levels in the financial center. The bank expects Hong Kong’s consumer price inflation to be around 5.3% for the second half of 2012.
New Zealand: First quarter growth fails to boost confidence
New Zealand‘s economy during the first quarter grew by 1.1%, the fastest quarterly pace in nearly five years, thanks to the spill-over effect of the Rugby World Cup late last year and record demand for New Zealand’s dairy products, such as milk powder from emerging Thomas White International 5 www.thomaswhite.com giants like China. The 2.3% jump in farm activity and 1.8% rise in manufacturing output in particular helped the country’s first quarter GDP figures.
However, the second quarter proved quite dull for New Zealand’s economy. Both New Zealand’s finance minister and central bank governor remained cautious about the momentum of their country’s economy despite the strong showing in the first quarter. The central bank governor signaled that New Zealand’s interest rates, which are currently at an all-time low of 2.5%, will not be raised anytime soon due to global uncertainties arising from Europe.
New Zealand’s consumers too seemed cautious about the recovery in the economy. The consumer confidence index compiled by ANZ National Bank sank to a low of 105.8 in June from a high of 113.8 in May. One of the reasons behind the fall in consumer confidence is the increase in New Zealand’s unemployment figures. The jobless rate in the country rose unexpectedly to 6.7% during the first quarter up from 6.3% in the year ago period. New Zealand’s unemployment figure has been above the 6% mark for the last three years according to Bloomberg. The high unemployment rate is also one of the reasons that New Zealand has held its low benchmark interest rates unchanged in the past two years.
On the other hand, to support further monetary action from the central bank, New Zealand’s conservative government is planning to reduce its fiscal deficit. The country’s finance minister, Bill English, said that the government is planning to cut non-essential spending and sell stateowned assets to return the country’s budget to a surplus for the financial year 2014-15.
Singapore: Inflationary pressure poses trouble for economy
Singapore‘s economy, which expanded strongly during the first quarter of 2012, faced intense inflationary pressure throughout the second quarter of 2012. While GDP during the first quarter rose an impressive 9.9% on the back of strong industrial production, inflation arising from higher wages and food prices is now persistently haunting the island nation.
In the past three months inflation has become such a problem that the Monetary Authority of Singapore announced that inflation will remain elevated for the next few months. The consumer price index has now breached the 5% mark consistently over the past many quarters.
Higher rents and rising private transportation costs have resulted in the monetary authority raising the inflation forecast for the year to average between 3.5% and 4.5% compared to its older forecast of 2.5% and 3.5% during the year. Even core inflation jumped to as high as 2.7% during the second quarter of 2012. Unemployment levels, which touched a three-year low during the second quarter, have also been contributing to higher inflation in the city-state.
Still, Singapore’s export industries, which showed some signs strains during the initial parts of the second quarter of 2012, picked up momentum during the later months of the second quarter. While the country’s industrial output registered a 0.3% fall in April due to declining electronics and pharmaceutical production, overall manufacturing picked up pace in May. During May, nonoil domestic exports along with a resurgence in pharmaceuticals and electronics production helped total exports jump 3.2%.
Despite the strong show from the export sector, Singapore’s GDP is predicted to have slowed considerably during the second quarter. A Reuters survey involving 11 economists gave an advance estimate of just 0.3% growth in GDP for the second quarter primarily because of the pressure on the country’s financial sector.
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