Asia looks steady, not spectacular in 2014
It’s that time of the year: a good point for a little introspection. Overall, 2013 brought its share of surprises, both ups and downs. But markets are signing off in a relatively cheery mood and investors are expecting better news ahead.
Plenty of headlines are predicting 2014 will bring robust global growth, well above the historical trend. At last, a flickering light at the end of the long, dark tunnel. And yet, amid the festivities, it might be worthwhile to observe a little temperance.
First, remember that we have been here before. Last December growth expectations were similarly optimistic, only to be disappointed. Likewise in 2012, and in 2011. For the past several years, financial markets expected higher growth than was eventually delivered. Forecasting is tricky business. But three years of misses raise the question whether the coming year will again fail to meet lofty expectations. Is there, perhaps, something fundamental being overlooked this time around?
Consider 2013. In emerging Asia, the biggest disappointment occurred in China and India. At the start of the year, the consensus forecast was for 8.1% and 6.5% growth in the two countries, respectively. The final numbers aren’t in yet, but it looks like China expanded by a mere 7.7%, while India grew by a relatively paltry 4.2%. Given their size, that’s quite a shortfall. Are the U.S. and Europe to blame? Not entirely. Neither met expectations, although they fell short only by a small margin. Japan, by contrast, surprised with its strength, growing much more briskly than expected, thanks to a heavy dose of stimulus.
Elsewhere in emerging Asia, economic activity also disappointed. For the region as a whole, growth in 2013 was probably at its lowest since the early 2000s. Indonesia, South Korea, Taiwan, Hong Kong, Malaysia, Thailand, and Vietnam all fell short of market expectations.
A salute to the Philippines, however. While the full impact of the devastating typhoon that struck the country on Nov. 8 is unclear, the economy performed admirably for most of the year. New Zealand, too, performed well and is holding up nicely, not least due to climbing prices for dairy products and a frothy real estate market.
It’s tempting to think all this weakness is a mere aberration, brought about by a confluence of unfortunate events that are unlikely to recur. As financial confidence recovers, and the U.S. economy returns to form, many expect growth in emerging Asia to snap back as well. Alas, this interpretation ignores more fundamental challenges plaguing the region. Stronger global growth will not deliver a quick fix.
The trouble lies with cheap money. Emerging economies generally, and Asia in particular, delivered a stunning rebound from the global financial crisis. And this has been all the more impressive given that demand in the West has remained lackluster ever since. Growth was primarily driven by local demand, or, in some cases, shipments to larger, booming emerging economies, above all to China. Yet this demand was, and continues to be, powered largely by credit.
Credit-driven growth was exactly what the world needed in recent years to prevent the Great Recession from turning into a depression, but it also has drawbacks. Over time, it loses its potency if not accompanied by robust growth in productivity. At the same time, easy money reduces the pressure for reforms, curbing the very gains in efficiency required to sustain growth.
In Asia, there are signs that productivity has slowed. This suggests that any pickup in global growth next year will not benefit the region as much as in the past. What is required are vigorous structural reforms stretching from trade liberalization to curbs on state-owned enterprises, from better infrastructure to a cutback in wasteful subsidies, from easier rules on foreign investment to improved financial regulation. That is not just China’s agenda, but Asia’s.
Over the past year showed that Asia is financially more robust than many had feared. Despite the turmoil in markets over the summer months, growth held up. In China, the spike in interbank rates during that period did not prove terminal. India and Indonesia, too, pulled back from the brink. That’s the good news. But for growth to rebound, more needs to be done. There are, at last, encouraging signs that officials throughout the region are finally starting to tackle reforms, but there is a long road ahead. A surge in growth next year is not yet on the cards.
Frederic Neumann is co-head of Asian economic research at HSBC. He is a former Fulbright scholar and has taught graduate courses in Asian economics and politics at a number of U.S. universities.