Likewise, when the global information technology bust dragged Asia into recession in 2001, forecasters turned out to be much too gloomy about Asia’s prospects. Once again, emerging Asia bounced back fairly briskly. Westerners have always been too quick to pronounce the death of the Asian economic miracle. This may be wishful thinking, but it also reflects some misunderstandings about the ingredients of Asia’s success. This year it was widely predicted that Asia’s economies would not recover until after America and Europe had revived. Yet Asia’s supposedly export-dependent economies have resumed growth before the rest of the world. How can that be?
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Sceptics argue that the pick-up simply reflects a temporary boost from rebuilding inventory, with no real increase in demand. Firms had cut production to below the level of sales in order to shed excess inventories, so now they need to reopen factories. This may be a factor in some countries, but in others firms are still running down their stocks.
In South Korea the decline in inventories accelerated in the second quarter, and the leanness of stocks bodes well for further gains in production over the rest of this year. Instead, the recovery has been led by investment and consumer spending. South Korea’s private consumption rose by an annualised 14% in the second quarter. In China fixed investment (on a GDP-consistent basis) is running more than 20% higher than a year ago, real consumer spending in urban areas is up by almost 11% and car sales have surged by 70%.
One reason why Asia’s emerging economies have been able to rebound well before those in the rich world is that their downturn was caused only partly by the slump in America. In 2008 domestic spending was squeezed by higher prices for oil and food (which account for a much higher share of household budgets than in other countries) and by tighter monetary policies, aimed at curbing inflation. China’s growth, for instance, began to slow well before global demand stumbled, as tight credit policies to prevent the economy overheating caused the property market and construction to collapse.
Across the region, aggressive fiscal and monetary stimulus has helped revive domestic demand. Asia has had the biggest fiscal stimulus of any region of the world. China’s package grabbed the headlines, but South Korea, Singapore, Malaysia, Taiwan and Thailand have all had a government boost this year of at least 4% of GDP. Most Asian countries, with the notable exception of India, entered this downturn with sounder budget finances than their Western counterparts, so they had more room to spend. Bank of America Merrill Lynch forecasts that the region’s public debt will rise to a modest 45% of GDP at the end of 2009, only half of the average in OECD countries.
Moreover, pump-priming has been more effective in Asia than in America or Europe, because Asian households are not burdened with huge debts, so tax cuts or cash handouts are more likely to be spent than saved. It is also easier in a poorer country to find worthwhile infrastructure projects—from railways to power grids—to spend money on.
In China the easing of credit has been even more important than its fiscal stimulus. Although lending slowed sharply in July, new lending by banks in the first seven months of this year was almost three times its level a year earlier. And across the whole of emerging Asia, cheaper money has been more potent in lifting spending than in the West. This is because, unlike in America and Europe, local financial systems are not crippled, so banks are able to lend more. And since Asian households and firms had not previously been on a borrowing binge (South Korea is an exception), they can afford to borrow more.
Growth rates will almost certainly moderate after the second quarter’s astonishing bounce. Even so, Mike Buchanan, an economist at Goldman Sachs, has raised his forecast for GDP growth in emerging Asia to 5.6% for 2009 as a whole and 8.6% in 2010. He expects China to grow by a breathtaking 9.4% this year and 11.9% next.
India’s GDP is forecast to grow by a more modest 5.8% in this fiscal year (ending March 2010). Exports accounted for only 15% of India’s GDP in 2008, compared with 33% in China, so India should have been much less affected by the global downturn. But because of its dire fiscal finances (a budget deficit of 10% of GDP last year), the government has had much less room to spur growth. The poor monsoon rains are also expected to reduce farm output this year. However, Mr Buchanan expects growth to increase to 7.8% next year.
document.write('');
Sceptics argue that the pick-up simply reflects a temporary boost from rebuilding inventory, with no real increase in demand. Firms had cut production to below the level of sales in order to shed excess inventories, so now they need to reopen factories. This may be a factor in some countries, but in others firms are still running down their stocks.
In South Korea the decline in inventories accelerated in the second quarter, and the leanness of stocks bodes well for further gains in production over the rest of this year. Instead, the recovery has been led by investment and consumer spending. South Korea’s private consumption rose by an annualised 14% in the second quarter. In China fixed investment (on a GDP-consistent basis) is running more than 20% higher than a year ago, real consumer spending in urban areas is up by almost 11% and car sales have surged by 70%.
One reason why Asia’s emerging economies have been able to rebound well before those in the rich world is that their downturn was caused only partly by the slump in America. In 2008 domestic spending was squeezed by higher prices for oil and food (which account for a much higher share of household budgets than in other countries) and by tighter monetary policies, aimed at curbing inflation. China’s growth, for instance, began to slow well before global demand stumbled, as tight credit policies to prevent the economy overheating caused the property market and construction to collapse.
Across the region, aggressive fiscal and monetary stimulus has helped revive domestic demand. Asia has had the biggest fiscal stimulus of any region of the world. China’s package grabbed the headlines, but South Korea, Singapore, Malaysia, Taiwan and Thailand have all had a government boost this year of at least 4% of GDP. Most Asian countries, with the notable exception of India, entered this downturn with sounder budget finances than their Western counterparts, so they had more room to spend. Bank of America Merrill Lynch forecasts that the region’s public debt will rise to a modest 45% of GDP at the end of 2009, only half of the average in OECD countries.
Moreover, pump-priming has been more effective in Asia than in America or Europe, because Asian households are not burdened with huge debts, so tax cuts or cash handouts are more likely to be spent than saved. It is also easier in a poorer country to find worthwhile infrastructure projects—from railways to power grids—to spend money on.
In China the easing of credit has been even more important than its fiscal stimulus. Although lending slowed sharply in July, new lending by banks in the first seven months of this year was almost three times its level a year earlier. And across the whole of emerging Asia, cheaper money has been more potent in lifting spending than in the West. This is because, unlike in America and Europe, local financial systems are not crippled, so banks are able to lend more. And since Asian households and firms had not previously been on a borrowing binge (South Korea is an exception), they can afford to borrow more.
Growth rates will almost certainly moderate after the second quarter’s astonishing bounce. Even so, Mike Buchanan, an economist at Goldman Sachs, has raised his forecast for GDP growth in emerging Asia to 5.6% for 2009 as a whole and 8.6% in 2010. He expects China to grow by a breathtaking 9.4% this year and 11.9% next.
India’s GDP is forecast to grow by a more modest 5.8% in this fiscal year (ending March 2010). Exports accounted for only 15% of India’s GDP in 2008, compared with 33% in China, so India should have been much less affected by the global downturn. But because of its dire fiscal finances (a budget deficit of 10% of GDP last year), the government has had much less room to spur growth. The poor monsoon rains are also expected to reduce farm output this year. However, Mr Buchanan expects growth to increase to 7.8% next year.
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