Asian Economic Outlook in 2009

The Malaysia Insider - 12 January 2009 

The Economist Intelligence Unit has made further significant reductions to growth forecasts for Asia and Australasia in 2009. The worsening global picture merits substantial re-evaluations to projections of economic growth in the region.

Our GDP forecasts for export-dependent Taiwan and South Korea have been cut by 4.2 and 1.1 percentage points, respectively. These two economies, along with Singapore and Japan, will be the worst performers in the region in 2009.

But even superstars like China and India are facing sharp slowdowns – albeit to still-robust rates of 6 per cent and 5.2 per cent respectively.

THE BIG THREE: China

China’s economic data make for increasingly depressing reading. The global crisis is taking a big toll on the export sector; export revenues fell year on year in November for the first time in more than seven years, while import spending dropped even more markedly.

But that is only part of the story. The other engine of China’s economy is sputtering, too.

Domestic demand is faltering amid a property-sector slowdown that has cut investment growth and hit output of steel and cement.

Accordingly, we have cut our forecast by another 1.5 percentage points and now expect the economy to grow by 6 per cent in 2009, down from an estimated 9.1per cent in 2008.

To be sure, higher government spending and policies aimed at resuscitating the property market will limit the damage.

But the downside risks to our forecast – which include an even-weaker global outlook, a collapse in consumer confidence, and a longer lag period as exports and property recover – continue to outweigh upside risks.


THE BIG THREE: India

India also set an unenviable record in November, recording its steepest decline in export growth in over a decade.

Moreover, the global trade slowdown is feeding through even to India’s domestically oriented economy.

As domestic and foreign investors seek to deleverage and to reduce their risk exposure, financing for investment and consumption is drying up.

Initially restricted to the industrial sector, the slowdown is spreading to the services sector as the squeeze on costs becomes more pervasive and demand slackens.

We have therefore lowered our forecast for GDP growth in fiscal 2009/10 (April-March), from 6.1 per cent to 5.2 per cent.

Moreover, the risks are on the downside. India’s budget and external deficits put the government in a weak position to implement supplementary fiscal measures if the global downturn proves even more severe.


THE BIG THREE: Japan

Japan was supposed to weather the global crisis better than other developed countries. Instead, it is facing a severe recession.

External conditions for Japanese exporters are bleak, with markets in the US and EU in the doldrums. Meanwhile, the squeeze on profit margins and the liquidity crunch are causing Japanese companies to cut back on capital investment.

Machinery orders, a key forward indicator of economic activity, are nose-diving at an unprecedented rate.

At the same time, declining real wages and rising unemployment will hit Japanese consumer spending.

We expect Japan’s GDP to contract by 2 per cent in 2009 (compared with our previous forecast of -0.5 per cent).


POOR PERFORMERS: Taiwan

We have slashed our forecast for Taiwan by 4.2 percentage points – more than for any other country in Asia. We now expect the economy to contract by 2.9 per cent in 2009 – making it the equal worst performer in the region.

This gloomy picture is a consequence of the economy’s vulnerability to the global slowdown. Exports of goods and services, which account for around 76 per cent of GDP, are already in decline.

Moreover, a collapse in fixed investment – much of which is export-oriented – highlights the fact that many manufacturers are scaling back their plans in anticipation of even weaker demand this year. Consumers, meanwhile, are in no position to pick up the slack.

This reflects a variety of factors, including plunging share prices and anxiety over job security. Taiwan’s unemployment rate has already hit a three-year high.

By some measures, consumer confidence has dropped to the lowest level on record. The government’s stimulus measures are unlikely to have a big impact.


POOR PERFORMERS: South Korea

We have further downgraded our forecast for South Korea’s economic performance; we now expect GDP to contract by 2.8 per cent (compared with a forecast contraction of 1.7 per cent previously) in 2009.

This largely reflects our increasingly pessimistic assessment of global growth prospects, given

that the deteriorating financial and economic environment abroad will have a negative impact on all components of South Korean GDP.

In recent years the main engine of economic growth has been exports, but shipments of goods and services are set to contract by 8 per cent this year.

Private consumption will shrink as the unemployment rate rises, putting downward pressure on wages. Economic uncertainty will also undermine consumer confidence more broadly, while problems in the local financial system will limit the availability of consumer credit.

Companies, too, will find it harder to obtain financing, and so they will cut back their investment plans as sales slow. The government is making increasingly aggressive use of fiscal and monetary policy to stimulate the economy.

So far, though, this has done little to boost confidence in either the won or domestic assets in general.


POOR PERFORMERS: Singapore

Singapore’s open economy is being battered by the global crisis. We are now expecting the city-state’s GDP to contract by 2.9 per cent in 2009, following estimated growth of just 1.9 per cent in 2008. Exports are set to contract as demand in the US and most of Singapore’s other important markets stagnates.

The prospects for Singapore’s crucial technology sector – which depends on electronics exports – are looking particularly poor. But it is not only the external economy that will be troubled in 2009.

We also expect growth in private consumption, which accounts for about two-fifths of economic activity, to weaken sharply, primarily because of the deteriorating labour market and tight credit conditions.

To be sure, the government will spend vigorously to prop up domestic demand. A spike in government consumption should help to offset a drop in private-sector investment growth.

But policy makers in Singapore, as elsewhere in Asia, face a severe test of their capacity to avert a deep and prolonged recession.


STILL COUPLED

There is no way of escaping the fact that growth will be disappointingly sluggish in comparison to the blistering rates recorded at the peak of the recent boom.

The main reason for this, of course, is that Asia is highly exposed to the global trade cycle – and, in particular, to the economic prospects of the developed world.

The current crisis has thoroughly debunked the once-common notion of “decoupling” – the idea that Asia had become a growth engine in its own right and would keep powering ahead if the US and Europe stalled.

Asia’s economic prospects are still tied to those of the developed markets, and it will be at least another year before they start to look brighter.