This week’s news confirms that economies around the world are cautiously growing again, with Asia leading. Both production and final demand indicators worldwide showed improvement, though indicators relating to consumer demand continue to give mixed signals, especially in the United States.
The recovery in Asia, particularly in China, is contributing to the nascent global export recovery reviewed in this space last week. However, any expectations that China or the broader Asian region can pull the world out of the doldrums are clearly unrealistic.
Policy makers participating in the Jackson Hole Symposium reiterated that the United States and Europe will persist in measures that reinvigorate domestic demand and return their financial system to health.
Recent news out of Asia points to a sharp recovery
- Industrial production is picking up after major declines in recent months. China’s production is up 10.8 percent (y-o-y) in July. Japanese production is up 2.3 percent (m/m) in June but down 23.5 percent (y/y), while production is up 5.7 percent (m/m) in South Korea in June, and up 7.8 percent in India in June (y/y).
- The Asian consumer is showing signs of life. South Korea retail sales picked up 1.8 percent (m/m) and 7.3 percent (y/y) in June, and sales in China in July rose 0.2 percent (m/m) and 15.2 percent (y-o-y). Retail sales rose 2 percent in Australia in the second quarter.
- Recent data reveal strong growth in the second quarter, with annualized growth rates reaching 3.7 percent in Japan, 13.9 percent in Hong Kong, and 9.2 percent in Indonesia. Singapore grew at an annualized rate of 20.7 percent, while South Korea grew 9.7 percent.
- Asia’s quick return to growth is reflected in the upward revisions of 2009 forecasts. Goldman Sachs predicts China will grow 9.4 percent this year; JP Morgan increased its growth prediction for Hong Kong to 9 percent (saar) in the third quarter. JP Morgan also revised upward its outlook for Asia (excluding Japan), predicting the continent will expand 7.5 percent (saar) in the third quarter.
Asia can “go it alone,” provided that exports are no longer a big drag
Assuming that, as described in last week’s Bulletin, global import demand keeps rising from its depressed levels, Asia—whose banks and consumer balance sheets are not impaired—has the capacity to sustain local growth.
- Though declining, current-account surpluses as a percentage of GDP are predicted to remain high, with rates of 6.5 percent in China, 9.2 percent in Hong Kong, 15.4 percent in Singapore, and 10.4 percent Taiwan (EIU), giving leaders the flexibility to maintain fiscal stimulus. Currency reserves also remain plentiful.
- July prices in China fell by 1.9 percent compared to last year, giving policy makers more leeway to keep a loose monetary policy without stoking inflation.
China’s role continues to be critical
China is the critical player in the Asian recovery effort. The recent improvements across Asia can often be attributed in part to China and its increased import demand.
- Taiwan’s economy contracted less than expected, falling 7.54 percent (y/y) this quarter compared to 10.13 percent last quarter, as June exports declined by the least in 8 months. Exports account for two thirds of Taiwan’s GDP.
- Japan’s annualized second quarter GDP growth of 3.7 percent came on the back of a 6.7 percent (q/q) increase in exports.
China also accounts for a large part of trade between Asia and the rest of the world. Excluding China, the Asian trade balance is in near equilibrium, and was actually negative during 2008.
But Asia will not pull the rest of the world out of recession on its own
Despite growth in China and the rest of Asia, the impact that a “rebalancing” of global trade with Asia will have on recovery in the rest of the world should not be overestimated.
- Even though the rest of Asia accounts for less than a quarter of world GDP, Chinese imports have been split evenly between those originating in Asia and those originating elsewhere since 2005. Thus, the benefits from increasing Chinese demand for imports will benefit Asia disproportionately. Only 5 to 7 percent of Chinese imports originate in the United States.
- The impact of the expanding Chinese import market on U.S. growth is often overstated. Since 2005, only 4 to 6 percent of U.S. exports are destined for China, less than those to stagnating Japan; all of Asia represents 23 to 25 percent of the U.S. export market. By contrast, Canada alone imports between 19 to 23 percent of U.S. exports.
- The 2008 Asian trade surplus represents less than 1 percent of the rest of the world’s GDP. Even a total rebalancing of trade, which would have a powerful negative effect on Asia, would not come close to replacing the recent 5 percent decline in output in the United States and European Union.
- Recovery in the United States and Europe will obviously be helped by government stimulus and global
trade recovery, in which Asia can play a role. However, the main driver of a sustained recovery must be domestic private demand, and first and foremost private consumption. This, in turn, will depend on the confidence and speed at which households and banks restore their balance sheets to health.
Worldwide production and financial indicators improved last week
After lengthy declines, an uptick in production indicators in the United States and Europe suggests that these regions may soon follow Asia out of recession.
- In the United States, the Philadelphia Federal Reserve’s manufacturing index rose to 4.2 in August from negative 7.5 in July, the first positive growth since September. U.S. leading indicators rose for the fourth consecutive month in July. Similarly, the eurozone Purchasing Manager’s manufacturing index (PMI) rose to 47.9 in August from 46.3. European Industrial orders rose 3.1 percent in June (m/m), the biggest gain in nineteen months.
- U.S. and European equities climbed on better-than-expected economic data and comments by Federal Reserve chairman Ben Bernanke and European Central Bank Chair Jean-Claude Trichet that bolstered confidence. The Dow Jones, the S&P 500, and the Nasdaq edged up between 2.3 percent and 2.9 percent as of August 24 mid-day compared to a week ago. In the same period, the UK FTSE 100 jumped 3.8 percent; the Chinese Shanghai composite index lost 1.8 percent, while the Japanese Nikkei fell by 0.2 percent.
Confidence in Europe is improving swiftly, while the data on U.S. consumer remain mixed
- Germany’s ZEW economic sentiment index surged to 56.1 in August from 39.5 the month before, its highest reading in three years. An index of the German services industry rose to 54.1 this month from 48.1 in July, signaling a pick-up in domestic demand. UK retail sales hit a fourteen-month high in July, up 0.4 percent from the previous month and 3.3 percent in annual terms.
- Reported sales of major U.S. clothing chains including Macy’s, Nordstrom, and Kohl’s posted earnings declines in the second quarter. Adding to growing strains on consumers, initial jobless claims in the United States rose by 15,000 to 576,000 last week.
- The U.S. housing market showed more signs that it is stabilizing from very low levels. Housing starts fell by 1 percent (m/m) to an annualized 581,000 in July. Mortgage delinquencies reached a record 13.2 percent in the second quarter. However, sales of existing homes jumped 7.2 percent in July to a seasonally adjusted 5.24 million annual rate, the highest rate in nearly two years but 19 percent below from the peak of the housing cycle in 2006.
Economic Policy: Large economies stay the course—cautious but supportive
Despite continued signs of improvement in the global economy, policy makers in the United States, EU, and China announced that stimulus policies will remain in place for the foreseeable future. However, concerns about inflation and asset bubbles are prompting central banks in a few smaller economies to consider increasing interest rates from their record low levels. Actions by the United States and Chinese authorities also indicate plans to scale back stimulus programs.
- Australia’s central bank signaled that rates might rise soon, citing potential risks in leaving interest rates too low for too long. Central banks in Israel, India, South Korea, Norway, and the Czech Republic also may raise key interest rates soon.
- The United States will end the popular “Cash for Clunkers” program on August 24, as it exhausts the $3 billion budget.
- The Fed decided not to expand its program of Treasury bill purchases, while the Bank of England Monetary Policy Committee opted for a smaller £50 billion quantitative easing, rather than the £75 billion voted for by the governor. Chinese authorities are taking steps to stem rapid loan growth.
To see how demand is evolving in Asia, look for the release of Japan real household spending on Thursday August 27 and retail sales on August 30. Japan’s July trade balance will be released on Tuesday August 25. U.S. durable orders and new home sales on will be released on Wednesday August 26, and personal income and spending on Friday August 28.
This analysis was produced by the editorial staff of the International Economic Bulletin, including Shimelse Ali, Bennett Stancil, and Uri Dadush.