Uncertain global prospects as key Asian economies seek to decouple

Let’s start with ailing Europe. The euro zone still faces a long, grinding road ahead, and the fate of the euro currency is hanging in the balance.

The European Central Bank has pledged to launch money-printing action to support Spain and Italy. Although it has yet to do so, the 10-year Spanish and Italian government bond yields have fallen by 200 basis points. This has given the euro-zone leadership some breathing space in the carrot-and-stick bail-outs.

But the fundamental questions remain unresolved. High indebtedness requires austerity, but the European folk might not tolerate this hardship for too long.

The competitiveness gap between the northern and southern European countries is structural. Germany and France, for instance, are creditor nations, while Spain, Italy, Ireland, Portugal and Greece are debtors. While creditor nations produce more than they consume, the debtor nations consume more than they produce, hence inducing high debt. 

One way for debtor nations to become more competitive is to devalue their currencies, but as those in the euro zone are tied to the single currency, they do not have that option.

 

UNEMPLOYMENT RISK TO EURO

“Whether and for how long countries stick with the euro and bear the pain of higher unemployment remains unclear. What is clear is that the higher the unemployment rate goes, the greater the risk to the euro from a real-economy perspective,” said a report by DBS Group Research issued on December 13.

High unemployment in the euro zone at more than 11.7 per cent, compared with 7.7 per cent in the United States, is a threat to social stability. Unemployment in Spain and Greece is around 26 per cent.

This year, the euro-zone economy will contract by 0.4 per cent, according to DBS Group Research. The situation won’t improve next year, when growth is forecast to remain negative at 0.3 per cent.

The prospects in the US are no better. The US Federal Reserve has announced a fourth round of quantitative easing (QE4), pledging to purchase US$85 billion (Bt2.6 trillion) of mortgage-backed securities and US Treasuries a month, and will keep the policy interest rate at zero until at least 2015.

Ben Bernanke, the chairman of the Fed, said QE would be kept humming until unemployment, now at 7.7 per cent, falls below 6.5 per cent and inflation threatens to breach 2.5 per cent. But if QE1 through to “Operation Twist” (QE3) have failed to jump-start the US economy, why would anybody believe that QE4 can perform magic?

QE is designed to prop up the banking system and the derivative market worth $700 trillion, and to finance the US government’s deficit. The Fed is now purchasing 70 per cent of US Treasuries issued to bridge the fiscal holes.

 

US FISCAL CRISIS

President Barack Obama and the US Congress are locked in a bitter fight over the so-called fiscal cliff – a combination of tax increases and spending cuts. Without an agreement, the economy in 2013 would be choked off, with $600 billion disappearing. This is equal to 4 per cent of the country’s gross domestic product.

A deal is being struck to avert the fiscal crisis as this article goes to the printing press. But at the end of the day, high government indebtedness will have to be tackled.

US corporates are sitting on a massive cash pile of $2 trillion, and banks have some $1.5 trillion in excess cash that they do not lend out.

The US economy has grown at 2 per cent this year, and will probably expand by around the same level next year if the US dollar holds on to its reserve status.

Going back to Asia, China is about to go through a big change under the country’s fifth leadership generation. Xi Jinping, who will head the world’s second-largest economy from next March, will be focusing on building up domestic demand.

“China will continue to implement the proactive fiscal policy and prudent monetary policy in 2013,” Xinhua said in a news report over the weekend. “The proactive fiscal policy will be combined with tax reforms and structural tax cuts, and the prudent monetary policy will pay attention to dynamism and enhance operational flexibility.” 

Given the economic difficulties in euro zone and the US, China cannot expect to keep its export machine humming for too long. Government-led investment is likely to feature more prominently in an economy that must keep the GDP growth rate high at 7-8 per cent to satisfy continuing employment.

China is facing a serious challenge in territorial disputes with its neighbours – from Japan to the Philippines and Vietnam – and geopolitical confrontation with the US in the Asia-Pacific region. Therefore, government spending to ensure a soft economic landing and a defence build-up to meet the challenges of China’s neighbours and the US will be two key policies of Xi.

 

NEW DIRECTION IN JAPAN

Japan is still stuck in the mud, economically. The Liberal Democrat Party, which has dominated Japanese politics over the past 50 years, is making a comeback with a vengeance. It promises higher defence spending and more stimulus – both fiscal and monetary – to revive the ailing economy, which is barely growing at all. It aims to drive the yen down further to boost exports.

Writing in UBS “Investment Research” on December 18, Takuji Aida said: “There will be a shift from a Democrat Party of Japan-led government (large tax increases, limited fiscal expansion, and moderate monetary easing), which has been focused on fiscal consolidation, stable growth and risk aversion, to one led by the Liberal Democrat Party (moderate tax increases, proactive fiscal expansion, and strong monetary easing), focused on growth, with the people’s support.”

Next year, Japan’s economy is expected to grow by 1 per cent at best.

According to DBS Group Research, China, unaffected by the euro-zone crisis and US weakness, will continue to maintain GDP growth at 9 per cent in 2013. India will come second at 6.5 per cent, followed by 6.3 per cent for Indonesia, 5.6 per cent for Vietnam, 5.3 per cent for the Philippines and 5 per cent for Thailand and Malaysia.

Overall, Asia will move solidly forward in the absence of a collapse in Europe or a global systemic financial breakdown.

 

Tomorrow: How technology and consumer behaviour change will affect the Thai broadcasting industry next year.