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Asia Regional Outlook - AUGUST 5th, 2007
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| Political & policy issues to watch |
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Political change
looms in Japan |
While Japan’s upper house elections have been moved back one week to July 29 the
outlook for PM Abe’s political future has become grimmer. The half-chamber election
could see the LDP lose control of the upper house, which would likely lead to PM Abe’s
resignation under pressure before year-end. While another LDP reformer may take his
place this would give anti-reformers in the LDP a major boost.
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The Thai conundrum
… political risk
vs the promise of
a rebound in 2008 |
Political events have accelerated in Thailand over the last month with the military moving to
entrench its ultimate authority over the political system. Despite this, the medium-term
political outlook remains very uncertain with the possibility of adverse political
developments that could damage the economy in 2008. Some analysts, however, expect
an economic rebound in the next 12 months, particularly following elections. Scope for a
rebound certainly exists as the current slump in consumer spending is tied more to political
uncertainty than to any damage to household incomes or balance sheets. If Thailand
produces a stable civilian government next year an economic rebound would be very likely.
But our reading of the political outlook remains less favourable. |
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Outlook for the market |
Stronger Asian
growth in 2H ‘07
… as exports
recover |
Our July report finds that most of the Asia/Pacific region is looking forward to stronger
growth in the next six months with weak or moderating inflation and stable or lower interest
rates. The biggest change confronting the region in 2007 is a major currency realignment,
which for most of Asia has meant a faster-than-expected rise on a falling US$. After
slower growth through 1H ’07 Asia’s exports of manufactured goods are expected to
gradually lift in 2H ’07. Taiwan, a useful bellwether for Asia’s IT exports, has just reported
an 11.3%yoy jump in exports for June at the end of a weak first half (1H ’07 exports rose
7.5%yoy versus 12.9% for the same period last year). Japan’s manufacturers also appear
to be optimistic about 2H ’07 with a 5.9%yoy lift in core machinery orders in May, double
the pace expected by the market.
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Inflation should
moderate |
Inflation is not expected to be a major problem in 2H ‘07. Three countries worried us in 1H
’07. In India most inflation measures suggest prices have peaked and started to fall in the
last four weeks. China still has a problem with food prices, notably pork, but outside of the
food sector price rises are mild. However, Vietnam’s prices continue to edge up and
tighter monetary policy should be expected over 2H ’07.
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Running out of
skilled workers |
This month’s charts-version of the Asia Brief includes an unemployment chart for 11 of the
14 countries. Across Asia unemployment rates are trending down, even though 1H ’07
saw a slowdown in export manufacturing. In the three countries without unemployment
data – China, India and Vietnam – the shortage of skilled workers is reported to be a major
problem. Most governments have lifted spending on education and training but this will not
produce results for several years. Until then companies will have to spend more on
retention and training as they struggle to keep pace with market growth.
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A fast rise for
Asian currencies
in 2007
… except the
Yen & NT$ |
Some Asian currencies have risen much faster than expected during 1H ’07, although this
also reflects a faster fall for the US$ on major currencies (see the Global Outlook). The
realignment is being driven partly by interest rate differentials and partly by a shift in Asian
central bank views in favour of currency appreciation. Based on January-June averages,
many Asian currencies had already reached or exceeded our full 2007 year average
forecasts. These include the A$ (on course for a 6% rise to 84 US cents year-average in
2007), the NZ$ (up 11.7% to 72 US cents), Malaysia’s ringgit (up 7% to 3.42), the Thai
baht (up 8% to 35.0), the Singapore dollar (up 5.5% to 1.51), the Philippines peso (up 9%
to 46.6) and the Indian rupee (up 9.2% this FY to 41.5). We expect the appreciation to
continue at a slower pace in the next six months, which means that 2007 will see a major
Asian currency realignment on the US$. Even China’s yuan appears to be on track for a
5% rise this year. The big exception remain the Japanese Yen (now expected to drop 4%
to a 121 average for 2007) and, to a lesser extent, the Taiwan dollar (likely to fall 1.5% this
year to a year average 33). Both these currencies have been undermined by low interest
rates and associated carry trade activity. |
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| Summary of forecasts in August 2007 Asia Brief |
GDP (Expenditure),
real growth, % |
2004 |
2005 |
2006 |
2007 |
2008 |
| Japan |
2.7 |
1.9 |
2.2 |
2.2 |
1.9 |
| China |
10.1 |
9.9 |
11.1 |
10.2 |
9.0 |
| Hong Kong |
8.6 |
7.5 |
6.8 |
6.3 |
6.2 |
| Taiwan |
6.2 |
4.1 |
4.7 |
4.4 |
4.8 |
| South Korea |
4.7 |
4.0 |
5.0 |
4.7 |
5.0 |
| Indonesia |
5.0 |
5.7 |
5.5 |
6.4 |
7.0 |
| Malaysia |
7.2 |
5.2 |
5.9 |
6.5 |
6.6 |
| Philippines |
6.2 |
5.0 |
5.4 |
6.5 |
6.5 |
| Singapore |
8.8 |
6.6 |
7.9 |
7.3 |
6.8 |
| Thailand |
6.3 |
4.5 |
5.0 |
4.0 |
4.6 |
| Vietnam |
7.8 |
8.4 |
8.2 |
8.3 |
7.8 |
| India (FY starting 1 April from FY 2004/05) |
8.3 |
9.2 |
9.4 |
8.2 |
8.0 |
| Australia |
3.7 |
2.8 |
2.6 |
3.8 |
4.0 |
New Zealand
(production GDP) |
4.5 |
2.2 |
1.5 |
2.9 |
2.2 |
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| Inflation, CPI year average, % |
2004 |
2005 |
2006 |
2007 |
2008 |
| Japan |
0.0 |
-0.3 |
0.3 |
0.2 |
0.4 |
| China |
2.4 |
1.6 |
2.8 |
3.0 |
2.5 |
Hong Kong,
(composite CPI) |
-0.1 |
1.2 |
2.2 |
2.5 |
2.7 |
| Taiwan |
1.6 |
2.3 |
0.6 |
0.6 |
1.0 |
| South Korea |
3.6 |
2.8 |
2.2 |
2.4 |
2.5 |
| Indonesia |
6.1 |
10.5 |
13.1 |
6.3 |
6.0 |
| Malaysia |
1.4 |
3.0 |
3.6 |
1.7 |
2.1 |
| Philippines |
6.0 |
7.7 |
6.3 |
3.0 |
3.8 |
| Singapore |
1.7 |
0.5 |
1.0 |
0.9 |
1.2 |
| Thailand |
2.8 |
4.5 |
4.7 |
1.7 |
1.8 |
| Vietnam |
7.7 |
8.3 |
6.6 |
8.1 |
7.5 |
India – CPI urban
non-manual workers |
3.8 |
4.6 |
5.4 |
5.5 |
5.5 |
| Australia |
2.3 |
2.7 |
3.5 |
2.8 |
3.0 |
New Zealand
(production GDP) |
2.3 |
3.0 |
3.4 |
2.9 |
3.2 |
| Exchange rate to US$1, year avg. |
2004 |
2005 |
2006 |
2007 |
2008 |
| Japan |
108 |
110 |
116 |
116 |
114 |
| China |
8.28 |
8.19 |
7.97 |
7.59 |
7.30 |
Hong Kong,
(composite CPI) |
7.79 |
7.77 |
7.77 |
7.79 |
7.79 |
| Taiwan |
33.4 |
32.2 |
32.5 |
33.2 |
32.5 |
| South Korea |
1146 |
1024 |
955 |
930 |
910 |
| Indonesia |
8,985 |
9,751 |
9,141 |
8,960 |
8,800 |
| Malaysia |
3.80 |
3.79 |
3.66 |
3.45 |
3.29 |
| Philippines |
56.2 |
55.0 |
51.3 |
46.5 |
45.0 |
| Singapore |
1.69 |
1.66 |
1.59 |
1.50 |
1.46 |
| Thailand |
40.2 |
40.2 |
37.9 |
34.0 |
33.0 |
| Vietnam |
15,718 |
15,832 |
15,970 |
16,131 |
16,294 |
India – CPI urban
non-manual workers |
45.20 |
44.13 |
45.30 |
41.00 |
40.00 |
| Australia |
0.74 |
0.76 |
0.79 |
0.85 |
0.85 |
New Zealand
(production GDP) |
0.66 |
0.70 |
0.65 |
0.72 |
0.69 |
Sources: CEIC, central banks and national statistics offices. Forecasts by country directors and IMA Asia.
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