Can Asia escape global secular stagnation?

AS we settle down for the end of the year, the picture on the economic front seems to be a bit clearer, although on the political front, the Paris attacks, the downing of a Russian jet by Turkey and continuing refugee migration into Europe have escalated geopolitical risks.

By spreading the war on terror from 9/11 in New York to Paris, consumer confidence in Europe is likely to suffer, depressing already a weak recovery in Spain, Italy and Ireland.

Fed vice-chairman Stanley Fischer, one of the wisest and most experienced central bankers, gave a speech earlier this month in San Francisco on Emerging Asia in Transition. His view was surprisingly upbeat but clear-eyed, noting that a slowdown in Asia is not slow but still impressive. The pattern of growth in Asia has been quite consistent – a period of fast growth before deceleration to a moderate level, and when the economy reaches maturity, as in the case of Japan, a phase of slow growth or stagnation. Fischer explained the growth through two major drivers – trade and demographics.

Export drive: One of the reasons for the Asian success story was the export-driven manufacturing, creating he Asian global supply chain

One of the reasons for the Asian success story was the rise of export-driven manufacturing, creating the Asian global supply chain. But after the global financial crisis of 2007, imports from the advanced countries declined, which was compensated by China’s imports of commodities from the commodity producers.

But once the investment-led cycle in China turned, commodity prices declined sharply and today, demand from the emerging markets also came down. On top of weak demand in the advanced economies, this meant real weak aggregate demand in the world, facing a situation of huge excess capacity in manufacturing and commodity production.

Basically, despite massive monetary creation, the world is facing slower growth with very little inflation in sight, namely, secular stagnation. The second factor for the current situation is demographics. East Asia had a demographic dividend, as a flood-tide of young labour emerged even as global exports took off. But the advanced economies of East Asia are aging, just like the advanced countries of Europe. The 2015 UN World Population Projections show these trends starkly.

The two manufacturing powerhouses, Japan and Germany, have the highest median population age of 47 and 46, and by 2030, just under one in three persons will be over the age of 65. By that time, Korea, Hong Kong and Singapore population would have one in four over the age of 65.

China and the US share roughly the same population profile, with the median age of 37 and 38 respectively, but by 2030, 21% of the US population would be over the age of 65, still higher than the 17% in China.

On the other hand, the younger populations in India, Bangladesh, the Philippines, Indonesia and Malaysia still enjoy potential for high growth, with a median age of not more than 29 years and by 2030, less than 10% of the population would be more than 65. These large population countries, with the right infrastructure and policies, have the potential to grow above 5% per annum, with India leading the charge at 7.5%. We cannot underestimate power of these emerging population giants as new engines of grow.

India is today a US$2 trillion GDP economy, one fifth the size of China, with roughly the same population. When the Philippines and Vietnam (100 and 91 million population respectively) reach the same per capita income as Malaysia, their economy would be in the US$1 trillion class, roughly 3 times the size of either Singapore and Hong Kong today.

On the same basis, Indonesia would be a US$2.8 trillon economy, roughly the same size as France today. One of the factors weighing down markets is the trajectory of interest rates, which are still historically low. The Fed may be interested in raising them back to normal, but the European Central Bank and the Bank of Japan are still committed to quantitative easing.

Emerging market interest rates and corporate borrowing rates have already started rising worldwide and this is, in the short run, negative to growth recovery. However, getting these population giants to move beyond the middle-income trap require huge reforms in many areas, including the power to put in infrastructure, educate the labour force and deal with structural impediments.

Countries like the Philippines and Vietnam are using external pressure, such as signing up to the TransPacific Partnership, to push through reforms even as opportunities for more trade appear. But the headwinds against such reforms are not small. Each country faces its own set of internal obstacles. In some countries, it is antiquated labour and land laws, in others corruption, inefficient state-owned enterprises, and lack of much needed infrastructure. In many, the transaction costs of doing business remain too high to compete effectively. In others, domestic giants resist competition from foreign multinationals that can bring in new knowhow and markets.

At the same time, labour unions and fear for jobs resist the introduction of new robotics and labour and resource-saving technology. All these risk factors collectively produce a global secular stagnation trap, very much like the 1930s, when no single government was strong enough to pull the world out of the global depression.

The US today is no longer in the position to be the lead engine. Even though it is recovering, US consumers are spending less on hardware imports and more on domestic services. Hence, even if emerging markets cut exchange rates to defend their trade positions, the exorable rise in dollar exchange rates spell future trouble because there are limits to the growing size of US trade deficits.

What can Asian countries do to get out of the secular stagnation? The answer lies in the willingness to reform and to restructure the current overdependence on exports, debt and manufacturing/resource exploitation. The willingess to bite the bullet will produce a J-shaped recovery, rather than the current L-shaped stagnation.

But every leader knows that reform is politically unpopular because it hits various vested interests. So all pundits deplore the lack of leadership. Leadership in these times of transition requires guts and will. The only problem is that it often takes someone else’s guts and the need to write the reformer’s own political will.

By Andrew Sheng Think Asian

Tan Sri Andrew Sheng writes on Asian global issues.


Related posts:

Global growth retreats

US Dollar-euro parity in sight To raise or not to raise: the uS Federal reserve Building in Washington, DC. the probability of a rate-h.

If China killed commodities super cycle, Fed is about to bury it

height="360" "width="640" Has the Commodities Supercycle Run Its Course? bloomberg.com Gordon Johnson, A...

If China killed commodities super cycle, Fed is about to bury it

Has the Commodities Supercycle Run Its Course?

bloomberg.com

Gordon Johnson, Axiom Capital Management analyst, discusses the outlook for commodities and the prospects for SolarCity with Bloomberg's Carol Massar on "Bloomberg Markets." (Source: Bloomberg)

For commodities, it’s like the 21st century never happened.

The last time the Bloomberg Commodity Index of investor returns was this low, Apple Inc.’s best-selling product was a desktop computer, and you could pay for it with francs and deutsche marks.

The gauge tracking the performance of 22 natural resources has plunged two-thirds from its peak, to the lowest level since 1999.

That shows it’s back to square one for the so-called commodity super cycle, a hunger for coal, oil and metals from Chinese manufacturers that powered a bull market for about a decade until 2011.

“In China, you had 1.3 billion people industrializing -- something on that scale has never been seen before,” said Andrew Lapping, deputy chief investment officer at Allan Gray Ltd., a manager of $33 billion of assets in Cape Town. “But there’s just no way that can continue indefinitely. You can only consume so much.”

If slowing Chinese growth, now headed for its weakest pace in 25 years, put the first nail in the coffin of the super cycle, the Federal Reserve is about to hammer in the last.

The first U.S. interest rate increase since 2006 is expected next month by a majority of investors, helping push the dollar up by about 9 percent against a basket of 10 major currencies this year.

That only adds to the woes of commodities, mostly priced in dollars, by cutting the spending power of global raw-materials buyers and making other assets that generate yields such as bonds and equities more attractive for investors.

The Bloomberg Commodity Index takes into account roll costs and gains in investing in futures markets to reflect actual returns. By comparison, a spot index that tracks raw materials prices fell to a more than six-year low Friday, and a gauge of industry shares to the weakest since 2008 on Sept. 29.

The biggest decliners in the mining index, which is down 31 percent this year, are copper producers First Quantum Minerals Ltd., Glencore Plc and Freeport-McMoran Inc.

With record demand through the 2000s, commodity producers such as Total SA, Rio Tinto Group and Anglo American Plc invested billions in long-term capital projects that have left the world awash with oil, natural gas, iron ore and copper just as Chinese growth wanes.

"Without fail, every single industrial commodity company allocated capital horrendously over the last 10 years,” Lapping said.

Drowning in Oil

Oil is among the most oversupplied. Even as prices sank 60 percent from June 2014, stockpiles have swollen to an all-time high of almost 3 billion barrels, according to the International Energy Agency.

That’s due to record output in the U.S. and a decision by the Organization of Petroleum Exporting Countries to keep pumping above its target of 30 million barrels a day to maintain market share and squeeze out higher-cost producers.

A Fed move on rates and accompanying gains in the dollar will make it harder to mop up excesses in raw-materials supply.

Mining and drilling costs often paid in other currencies will shrink relative to the dollars earned from selling oil and metals in global markets as the U.S. exchange rate appreciates.

Russia’s ruble is down more than 30 percent against the dollar in the past year, helping to maintain the profitability of the country’s steel and nickel producers and allowing them to maintain output levels.

"The problem with lower currencies is operations that were under water a year ago are all of a sudden profitable on a cash basis," said Charl Malan, who helps manage $31 billion at Van Eck Global in New York. "Why would you shut them?"

While some world-class operators such as Glencore plan to cut copper and zinc output, others like iron-ore producers BHP Billiton Ltd., Vale SA and Rio Tinto are locked in a "rush to the bottom" as they seek to drive out competitors by maintaining supply even as prices slump, according to David Wilson, director of metals research at Citigroup Inc.

“With the momentum on the downside, it’s very difficult to say that we’re reaching a bottom,” Wilson said.

Source: Bloomberg

Related post:

• Asian finance uncertain future