Asia Still Hanging in
The gloomsters would have us believe that the end of the world is upon us, that the world “recession/depression is about to descend.
China is slowing, cutting back purchases of commodities, like iron ore, as Mount Gibson (our tiny 4th placed iron ore exporter) revealed to the ASX yesterday.
Likewise Japanese machinery orders fell again in August, which was taken as a ‘bad sign’ when in fact it merely matched the slide in industrial output and exports seen in the past month or so. With Japanese car production down, you’d expect machinery orders to be down as well.
Yes it was a third successive fall, and yes Japan is experiencing a downturn, but like Australia, its banks are now sound and very well-resourced, as are Japanese companies.
Life is tough in world markets, especially in the US and especially for cars, machine tools, consumer entertainment and IT products, but Japan is not the Japan of the terrible period 1989 to 2002.
China cut rates for the second time in less than a month, South Korea, Taiwan and Hong Kong matched the rate cuts of the bigger central banks (but Australia remains out in front).
Japan didn’t cut rates because they are already at half a per cent and there’s not much room to go. In fact Hong Kong’s cut was the second in as many days after the banks trimmed the margin over a key US rate for basing local rates on Wednesday.
Some commentators took that as being symbolic: in reality it’s just another example of what happens when you have a bubble and you don’t tackle it head on, as the rest of the world is now slowly doing with the credit crunch/freeze.
China’s rates are now 0.54% lower in less than a month: sounds like they are taking advantage of the drop in headline inflation in the last four months to try some stimulation.
In fact these events are all symptomatic of a region and economies being hit by the swirling forces from the great credit crunch and freeze. It would be natural for that to happen, but it is not the end of the world, nor will the Asian region be as rattled as the US, Europe and the UK.
Even sluggish Japan will be doing better than the US, Europe and the UK by this time next year, according to the latest forecasts from the International Monetary Fund this week.
It was a gloomy and, some would argue, more realistic World Economic Outlook from the IMF with its grim message: “The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s”.
But there are hints and figures throughout the gloomy report that provide some little rays of sunshine for Australia: we are not the basket case some here would have us believe, although economic conditions have worsened globally, hence the 1% rate cut by the Reserve Bank this week.
The strongest growth this year and next will be in the Asian region, the area we have become ‘coupled’ to: in fact the IMF’s much reduced 3% estimate for the world next year depends exclusively on growth in Asia, led by China and India.
Here’s what the Fund said about what it called “Emerging Asia”, which excludes Australia, South Korea, Japan, Taiwan, New Zealand and Singapore.
“Growth in the region is projected to moderate to 7¾ percent in 2008 and 7 percent in 2009 from 9¼ percent in 2007. Weakening external demand is likely to weigh on exports, but, in some cases, the impact may be mitigated by still-loose macroeconomic policies and currency depreciation. Investment will also moderate, mainly because of deteriorating export prospects.
“Consumption will ease because of still-high fuel and food prices, although subsidies, which are common in the region, may cushion the impact on purchasing power. The risks to the outlook are firmly to the downside.
“The main concern is that a buildup of stress in the global financial system and a sharper-than anticipated global slowdown could further weigh on activity. On the upside, domestic demand may prove more resilient, with falling commodity prices providing a boost to real incomes.”
“The WEO notes that commodity prices remain at much higher levels in real terms than at any time in the past 20 years, despite some correction since mid-July amid the slowdown of the global economy.
“The driving force behind the sustained run up in commodity prices has been the tightness of demand-supply balances for many key products and the realization that markets are likely to remain tight for the foreseeable future, after many years of ample spare capacity.’
And that’s the core of the goodish news from the IMF outlook for Australia and that ‘good’ news for Australia is better than the news from the Fund’s latest report being received in the US, Japan, UK and Europe, and even in New Zealand.
But the situation is still dangerous, as the Fund said at a media briefing: “The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s”. That can’t be forgotten.
But while investors sell the Australian dollar and shares because of our exposure to global growth and commodities, those disappearing over the horizon (and those quietly cheering their departure here) should read the IMF’s report because they will find one tantalising comment in particular about the outlook for 2009.The Fund identified three factors that would lay the groundwork for the gradual recovery next year: the stabilisation of commodity prices, although at 20-year highs; a bottoming out of home price declines in the worst US housing slump in decades; and the resiliency of emerging economies “benefiting from strong productivity growth and improved policy frameworks”.
Gee, after the huge sell-off in the likes or oil, copper, nickel, lead and zinc, not to mention many softs and agriculturals, commodity prices will still be at their highest level for two decades. While not the stuff of the so-called commodity super-cycle promoted by some analysts, it’s a far healthier position if achieved than many doomsters here would have us believe.
The Reserve Bank knows our terms of trade are going to retreat in the coming year as demand and consumption fall, but demand higher than in the past couple years, will still be there to keep things ticking over.
China seems determined not to allow its economy to go off the boil. India is, but more problematic with an election next year. But even the developed economies of the region in Japan, South Korea and Taiwan will be doing much better than the US and Europe.
The Fund cut its July forecasts updates for global economic growth to 3.9% for this year and 3.0% for 2009, the slowest pace since 2002. The revisions shaved off 0.2% and 0.9% from both years, respectively.
“The major advanced economies are already in or close to recession, and, although a recovery is projected to take hold progressively in 2009, the pickup is likely to be unusually gradual, held back by continued financial market deleveraging,” the report said, hours after the US Federal Reserve and five other central banks coordinated cuts in interest rates to boost economic growth and jump-start credit flows.
The IMF said that emerging and developing economies were also slowing and “The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control”.
It warned that the growth projections for 2009 came “against an exceptionally uncertain background … and the outlook is subject to considerable downside risks, with the US, Europe, the UK and Japan close to or sinking into recession”.
But against that big qualification, it’s not all bad: Australia will still grow by 2.5% and 2.2% next year, China will grow by 9.7% and 9.3% next year and growth in many other parts of Asia, outside of Japan, will still have modest growth, albeit down from the levels of this year.
But compared to the sort of 2009 that confronts Europe, the US, UK, and especially countries like Ireland and Italy and America, Asian growth outside of Japan will be positively booming by comparison.
Even Japan will be doing better than much of the developed world: the IMF estimates that the Japanese economy will grow at 0.7% this year (off a substantial 0.8% and 0.5% in 2009, down a full 1%).
The United States by contrast will grow at 1.6% this year (thanks to the strong second quarter growth of 2.8% for GDP) and a bare 0.1% next year.
Two eurozone economies were set to contract: Italy, both this year and next, and Spain, in 2009, while the UK will contract by 0.1% next year after growth of just 0.1% this year (and it’s already in the can).
But China will grow by an unchanged 9.7% this year and 9.3% next year, which was a cut of 0.5%.
Again it’s not to say it’s all on the up for Asia: as the IMF says the risks are firmly “on the downside”.
“In this exceptionally uncertain situation, there are substantial downside risks to the baseline outlook. In addition to concerns related to protracted financial stress and the deteriorating U.S. housing market, potential disruptions to capital flows to emerging economies and the risks of rising protectionism represent additional risks to the recovery.
“Inflation risks to growth are, however, now more balanced because commodity prices have retreated in response to slowing global growth
“The advanced economies grew at a collective annualized rate of only 1 percent from the fourth quarter of 2007 through the second quarter of 2008.
“The U.S. economy suffered the most from the financial crisis that originated in its subprime mortgage market, which has tightened credit conditions and amplified the housing correction that has been under way since 2006.
“Emerging and developing economies have not decoupled from this downturn.
“The WEO notes that growth has also eased for this group of countries as a whole.
“Growth has been most resilient in commodity-exporting countries, while the countries with strong trade links to the United States and Europe are slowing markedly.
“Also, some countries that rely heavily on bank-related or portfolio inflows to finance large current account deficits have been hit hard by an abrupt tightening of external financing.”
That’s Australia in a nutshell in the last two paragraphs: solid commodity driven growth, large current account deficit funded by high short term borrowings. It is still a finely balanced thing here.
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