The ramifications of the “boom-turned bust” are now well documented. The unprecedented global imbalances created
and fed the debt-fuelled boom of the last several years, pouring fuel on the fire of Wall Street’s extravagances. So the consequences of their correction have been brutal, especially for countries that were major players in the build-up phase.
Notwithstanding “green shoots” of recovery, some of the world’s largest economies now face huge medium-term transitions. In the US, for example, which relied on rising debt ratios for the entire growth cycle to mid-07, growth must now be subject to cutting debt.
The “recovery” thus far, starting with the Anglo Saxons but now also including much of Europe and Asia, is hinged on Keynesian deficit budgeting (and, in the US/UK, Friedmanite stimulus as w e l l ) . So far, especially in Asia, it has been highly successful.
Japan exited from technical recession in the second quarter, with the bounce led by both consumer spending and net exports.
It outpaced both the US and UK, which shrank by 0.3% and 0.8% respectively but also Germany and F rance, which grew by
0.3% each.
Four of the five emerging Asian economies that have reported second quarter GDP so far have also rebounded strongly. Singapore grew by a 20% annualised real rate, South Korea and Indonesia by around 10% ar each and China by an 8% yy rate. India, meanwhile, still has excess heat from three years of seriously above-trend growth and never meaningfully slowed in the first place.
Excess slack in emerging Asia could disappear much faster than in both the developed world and emerging Europe.
Although at present, for most of Asia bar India, the slack remains huge. Whether recent growth will be sustainable remains to be seen. Our expectation is for a “double-dip” outcome – a brief recovery of between one and two years, followed by relapse.
The fundamental reason for scepticism on the durability of the ongoing recovery is the ability of consumer spending to pick up the slack once fiscal stimuli fades. In Asia ex-India in particular, which is by demand deficient (as indicated by massive current account surpluses), much of the latest rebound has been the “China effect” the destination of most of their exports and a
favourable production cycle.
China of course lies at the epicentre of the global adjustment process: the overseas surplus corresponding to the US current
account deficit is mostly in China. Unlike most in its group, eg, Germany and Japan, that have confirmed the expected brutal recessions, official Chinese data suggest the economy has continued to grow, possibly by as much as 20% annualised in the second quarter.
Gauging the temperature of the Chinese economy is notoriously difficult. The numbers given are frequently not credible and only real growth rates from the year before quarter, not real levels, are published. Much of the recent “recovery” likely reflects a large positive effect from stockpiling and of course government enforced bank lending. But its sustainability is predicated on a hefty reduction of its external surplus through a fall in the national savings rate (of over 50% of GDP) and a commensurate rise in domestic consumption. Despite some recent policy efforts, inhibitive capital controls, the lack of an adequate welfare/pension system and freehold titles on land, are amongst the factors likely to prevent this needed adjustment.
The more likely outcome, at this stage, is that the external surplus is reduced by raising the already excessive investment rate (of over 40% of GDP). China already has good infrastructure, while the recession means that the need for business capex is sharply cut and housing investment has slumped.
So the danger is that its statist, top-down policies and lack of a market-driven economy will instead promote large volumes of wasteful investment, which in turn will result in a distinctly lower trend growth rate.
Our current projections imply a 3.8% reduction in Chinese trend growth over the next five years, from nearly 10% to 6%. Set against this backdrop, it is difficult to envisage a sustained Asian recovery. Most of the region, including Japan, has depended on exports for growth. Japan, having lost five years of growth in this financial crisis, is unlikely to “make up” this loss over the next four years.
Notwithstanding the constructive change in the MOF’s fiscal stance, from fiercely tight to moderately loose, its trend growth rate is expected to be in the 0.5% region, from 1.5% previously, representing a severe cut. For both Japan and the export-driven Tigers, competing with the already ultra-competitive Chinese exporters will be a tough game going forward.
The anticipated fall in the Tiger’s trend GDP growth is from 5% to 4%. India stands out as being domestic-demand driven and with no major role in the build up of global imbalances. But here excessive pre-election policy ease, both monetary and fiscal, now threatens a bout of 1970’s-style stagflation. Real growth should be 4.5-5% next year, with a new trend rate of 6%, from 7.5% until recently.