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The East Asian export economies are in for a rough 2012.
Singapore’s economy contracted last quarter, falling 4.9%. Not all analysts predict the current period will also be down, but don’t expect a robust expansion anytime soon. Prime Minister Lee Hsien Loong, in his New Year message, repeated the government’s forecast of 1% to 3% growth for this year. Singapore expanded at a sizzling 14.5% rate in 2010, a record.
There’s no mystery why Singapore’s economy, a regional bellwether, is in trouble. The country’s trade is about three times its gross domestic product, and the external outlook is not favorable. Prime Minster Lee, not surprisingly, blamed the deteriorating global environment in general and Europe in particular. “As a small, open country,” he noted in his message, “Singapore will inevitably be affected.”
And so will tiny Hong Kong’s trading economy. Analysts are talking about 2% growth this year, down from a forecasted 5% for 2011. The slowdown has already started. Growth estimates for last quarter range from a relatively optimistic 3.3%, from HSBC, to a gloomy 1.5%, issued by JP Morgan.
It’s not only the small open economies that are having problems. India, which is certainly large and not considered especially trade-dependent, is also seeing the economy stumble. There, the retreat from reform is having a negative effect. Growth could drop below 6%, from 6.9% last quarter.
Japan may have actually contracted in Q4. The Tokyo-based Japan Center for Economic Research estimates that the economy shrank in both October and November, in large measure due to weak exports with Europe as the primary culprit. The weak fourth quarter is especially disheartening as it ends the recovery evident in Q3, when the economy soared 5.6% due to rebuilding from the March 11 earthquake-tsunami.
South Korea, a pillar of strength in East Asia, is also experiencing difficulties. The Bank of Korea, the central bank, is lowering forecasts for both this year and last. Nomura International sees South Korean growth slowing to 3% in 2012, due to softness in exports, off from an estimated 3.5% for 2011. If there is a risk to the Nomura estimates, it is to the downside.
The story is much the same in flood-ravaged Thailand, where there was a contraction in Q4 due to export problems; the steady Philippines, hurt by export prospects for the electronics sector; and impressive Vietnam, where analysts think that growth last year was off the 2010 pace. If you’re looking for exceptions to the downward trend, try Indonesia, where growth remained steady at 6.5% last quarter, and Malaysia, which was helped because exports held up last year. In Kuala Lumpur, however, the government is now worried about Europe.
The eurozone’s worsening problems are affecting the export-dominated economies of East Asia hard. The 17-nation zone contracted in Q4, and it will probably shrink this quarter as well. “We expect a fall in GDP of about 1.0 per cent this year and an even sharper decline in 2013,” said Jennifer McKeown at Capital Economics. Unemployment is at a record high, retail sales are falling, and consumer and business confidence is headed in the wrong direction.
The zone’s performance will continue to fail to meet consensus estimates because there is an unreal quality to expert predictions about Europe. The eurozone’s problems, despite the serial announcements of interim solutions, remain intractable. European leaders need growth, and they are not going to get it until they either fundamentally restructure their currency or implement some sort of fiscal union. And on top of that, they need to eliminate growth-destroying regulation.
We are talking years, if not a decade, before Europe again contributes to East Asia’s economies. Until then, Asians need to rely on indefatigable American consumers and hungry purchasers from the remaining markets in Africa and Latin America.
And East Asian countries need one more thing: a successful China. It would help if China’s export sector does well so they can export more raw materials, components, and semi-processed items to Chinese factories, yet it’s unlikely that China’s producers will do substantially better than those in neighboring countries. After all, all Asian exporters face the same weak European and American markets.
Therefore, East Asia’s economies need China to develop its own internal market. Chinese consumption is growing in absolute terms, but it has continued to fall as a percentage of the Chinese economy. Consumption in China accounted for only 33.8% of GDP in 2010, and it does not appear there was any significant movement in that number last year.
And just as Europe needs to make structural changes to engineer a recovery, China must fundamentally transform its economy if it wants to increase consumption. Beijing’s economic model, unfortunately, takes money out of the hands of individuals and transfers it to producers. The state banking system, for instance, keeps deposit rates low so that it can provide cheap credit to over-leveraged state enterprises and cash-strapped local governments.
At the moment, China’s exports are faltering—despite too-good-to-be-true numbers from the Ministry of Commerce. So if East Asian economies are ever to break their dependence on North American and European markets, they must be able to sell to China’s 1.3 billion consumers.
Unfortunately, Beijing has yet to change its investment-led, export-heavy model. Even when Chinese leaders make the decision to implement the structural changes to increase consumption—as opposed to providing temporary incentives for appliance purchases—it will take at least a decade to get consumers into the shops in sufficient numbers.
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