Dttl Dr Apeconoutlook Dec2012

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Asia PacicEconomicOutlookDecember 2012

ChinaJapanMalaysiaThailand


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Asia Pacic Economic OutlookDecember 2012 2

Chinese economic growth is nally accelerating

after experiencing a substantial slowdown duringthe past year. A rise in government-funded investmenthelped to offset the considerable weakness in exports toEurope. Interestingly, exports to other geographies haveactually improved. In October, overall exports were up11 percent from a year earlier, signicantly exceedingexpectations. This, in turn, contributed to a 9.6 percentincrease in industrial production in October, offering theprospect of stronger GDP growth in the fourth quarter.In November, a private sector purchasing managersindex for manufacturing moved into positive territoryfor the rst time since July and indicated the fastest

rate of growth in the sector in more than a year. InOctober, retail sales growth accelerated from September,suggesting that the consumer sector is improving aswell. Thus, it appears that China is on the mend.

Moreover, with prices up a mere 1.7 percent in Octobercompared to a year earlier, consumer price inationdecelerated substantially, reaching the lowest rate ofination in 33 months. This means the central bank hasconsiderable wiggle room if it chooses to further easemonetary policy in order to stimulate the economy.

However, although growth is showing signs of revival,

China still faces some challenges. For example, foreigndirect investment (FDI) into China declined in Octoberfor the 11th time in the last 12 months. Slowinggrowth in China, weakness in the global economy, arising currency, rising wages, and political uncertaintyare all likely reasons for the deceleration of inboundinvestment. For the rst 10 months of 2012, inboundFDI was down 3.5 percent from 2011. Outboundinvestment from China, however, increased strongly.In the rst 10 months of the year, outbound FDI wasup 25.8 percent from 2011. This suggests that Chinesecompanies are actively searching for resources and for

new opportunities around the world. Chinas higher-valued currency means that foreign assets are relativelycheaper. Recent weakness in commodity prices probablymakes commodity-production resources cheaper as welll.

Challenges for new leadershipTurnover in Chinas political leadership raises questionsabout the likely path of government policy and how thenew leadership is likely to tackle longer-term economicchallenges. Interestingly, outgoing Chinese President HuJintao recently said that China should plan to double per

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capita GDP from 2010 to 2020; this goal may be realisticif Chinese economic growth doesnt slow down. This willlikely require signicant reforms aimed at maintaininglong-term growth in the face of challenging demographics.Hu hinted at reforms by calling for the private sector tohave equal access to factors of production. Hu alsocalled for improving the ability to innovate and for a boostto domestic demand. Equal access for the private sectoris signicant. Today, state-run businesses have favorableterms of credit, thus frequently limiting credit to private-sector businesses, especially smaller ones that must payvery high rates of interest in the informal credit sector.Reformers want to free-up market interest rates that arecurrently set by the central bank and allow all borrowersto compete freely for credit. Hus evident support forthis measure could presage considerable reform of creditmarkets. However, doing so will likely have the effect ofreducing the prot margins of state-run businesses.

Another issue is the necessity of shifting away fromexport-led growth toward consumer-led growth. Risingwages are already helping to make this happen. Forexample, in the past three years, the wages of Chinasmigrant workers increased 56 percent. Yet, exportershave mostly not passed on this cost increase to theircustomers. The prices of US imports from China roseonly 4 percent in the last three years. Absent hugeproductivity gains, this pattern cannot be sustainedindenitely as it would ultimately mean disappearingprot margins. Rather, export growth will likely decline,and with big wage increases, consumer spending in Chinashould grow faster. Market-opening reforms can help toaccelerate this change in Chinas economic structure.

Turnover in Chinas political leadershipraises questions about the likely path ofgovernment policy and how the newleadership is likely to tackle longer-termeconomic challenges.


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The Japanese economy appears to have entered

a recessionary phase. In the third quarter, JapansGDP declined 0.9 percent over the previous quarter. Thisrepresents an annualized decline of 3.5 percent, andthe economy may also contract in Q4 2012. A dip inexports to Europe was accompanied by weaker exportsto Asian economies in Q3 2012. Consumer spending,which accounts for over 50 percent of Japans GDP,experienced its second consecutive quarterly drop.Furthermore, capital spending slipped for the rsttime since mid-2009. However, a faltering economyis only part of the story. The central banks monetarystance and political transitions will likely attract more

attention in the coming months. The possibility of achange in political leadership following the generalelection in December is heightening policy uncertainty.

The main factor contributing to GDP contraction was adrop in exports. Net exports shaved nearly 0.8 percentfrom GDP in Q3 2012 as nominal exports ebbed in 10 ofthe past 13 months. October marked the fth consecutivemonthly decline wherein exports dropped by 6.9 percent.Meanwhile, higher demand for fuel has increased theimport bill, and Japans trade decit has remained innegative territory. Territorial disputes with China have

made matters worse. In October, sales of Japanese-brandpassenger cars were down 38.2 percent over the previous

month and down a staggering 59.4 percent year-over-

year. However, trade ministers from China, Japan, andSouth Korea have initiated discussions for a trilateralfree-trade agreement. The talks, if successful, will likelycreate one of the worlds biggest free-trade zones.

The Japanese government lowered its view of theeconomy for the fourth consecutive month. Weakcorporate spending was one of the main factors for thedownward assessment. The government is also pessimisticabout bankruptcies, the employment situation, andcorporate protabilityespecially among manufacturers.In addition, domestic demand could lose momentum,

which does not bode well for private consumption.

The Democratic Party of Japan is likely to lose its majorityto the opposition Liberal Democratic Party (LDP) in thegeneral election scheduled for December 16, and ShinzoAbe may become the countrys new prime minister.Mr. Abe has promised additional stimulus to revive theeconomy, and he called for an even more aggressivemonetary intervention by the central bank. Someexperts believe that Mr. Abes stance on reforming theBank of Japan (BoJ) law to make the central bank moreaccountable to the government could impinge on the

independence of the central bank. While changes to theBoJ law will be difcult to implement, the next government

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will nominate up to three new members of the nine-member board of governors, including a replacementfor the current governor. As a result, the LDP couldexert signicant inuence on future monetary policy.

Meanwhile, the BoJ decided to keep its monetary policyunchanged in its meeting on November 20. Interest rateswere held at between 0 and 0.1 percent, and the sizeof the asset purchase program was not increased. Aftertwo consecutive months of easing, the BoJs monetarystance was in line with expectations. Moreover, theBoJ might face increased political pressure to adopt

aggressive monetary expansion, following the generalelection in December. As a result, the central bank

might have preferred to hold back on its limited policyoptions during this meeting. The BoJ has expanded itsmonetary stimulus four times this year by increasingthe size of its asset purchase program to $1.2 trillion.

While monetary policy could play a major role inJapans recovery, the central bank has not been ableto deliver on its targets. Japan continues to face adeationary environment, and the BoJs target of 1percent ination is unlikely to be achieved this year.Moreover, the BoJ remains weary to the risk of a risein the value of the yen amid unlimited quantitative

easing by the US Federal Reserve. Yet, much of the onusof supporting the economy might fall on the BoJ.

While monetary policy could play a major rolein Japans recovery, the central bank has notbeen able to deliver on its targets.


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Robust domestic consumption bolstered Thailands

economy during the third quarter of 2012. Aftergrowing at 3.3 percent in the second quarter, ThailandsGDP growth came in at just 1.2 percent in Q3 2012.Private consumption grew by 6.0 percent over the previousyear and shielded the economy from external headwinds.Moreover, higher investments and government stimuluspolicies compensated for a decline in exports. Althoughthe third-quarter performance exceeded expectations,key economic indicators signal a deceleration from theprevious quarter. As a result, the National Economicand Social Development Board lowered its 2012GDP growth forecast to 5.5 percent. Meanwhile, the

Bank of Thailand (BoT) kept its 2012 growth forecastunchanged at 5.7 percent but lowered its projectionfor 2013. Downside risks persist, and the Thai economywill remain vulnerable to the external environment.

Thailands growth decelerated in Q3 2012 largely dueto a drop in exports. Economic weakness in the UnitedStates and China dragged Thai exports down 1.2 and 11.8percent, respectively. Furthermore, Thailands exports inOctober rose less than expected. In October 2011, a oodbattered the Thai economy, and economists expectedexports to grow by 20 percent over the previous year.

However, data for October revealed that exports were

up 15.6 percent from last year and up 5.8 percent from

September 2012. Shipments to the European Union,Japan and the United States recorded strong growth, butexports to China declined. While exports in Novemberand December are expected to be robust primarily due tobase effects, the BoT lowered Thailands export growthforecast for 2012 from 7.0 percent to 4.4 percent.

The automobile sector staged a remarkable recoveryas vehicle production hit a record high in October.Production increased to 252,165 vehicles in October,up 8.4 percent over September and more than vetimes from the same period last year. Tax incentives for

rst-time buyers pushed demand and resulted in higherproduction. Furthermore, an uptick in production wasaccompanied by a rise in vehicle exports. While month-over-month export growth was relatively at, exportswere up 79.7 percent over the previous year. A strongperformance in the automobile sector could boosteconomic activity. However, industrial condence ebbedfor the fth consecutive month in October. Concerns overthe health of the global economy and higher operatingcosts weighed down the sentiment. The index came in at93.0 in October, down from 94.1 in September and 98.5in August 2012. A reading below 100 indicates pessimism.

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Meanwhile, Thailands cabinet approved a proposal toimpose the minimum wage of 300 baht per day all overthe country beginning January 1, 2013. Employer costs arelikely to increase by 1015 percent, owing to the wagehike. The Federation of Thai Industries (FTI) is likely topropose to the government certain measures that will limitthe impact on the private sector. The FTI suggested theestablishment of a wage differential compensation fundto help small and medium-sized rms handle the rise inwages. If the government agrees to the proposal, its scalbill may rise substantially in the coming year. Moreover,some experts believe that the policy will have no positiveoutcome for the industry because worker productivity

is unlikely to increase, given the skill decit. In addition,it is also possible that some companies may relocateoperations to other countries in order to reduce costs.

Contributions from reconstruction-related spendingsupported the recovery until now, but they willlikely recede. While the economy is expected togrow by 15 percent over last year in Q4 2012, thegrowth will be largely due to low base effects.With year-over-year comparisons skewed by the2011 ood, it will be difcult to ascertain the realmomentum of the economy going into 2013.

Private consumption grew by 6.0 percentover the previous year and shielded theeconomy from external headwinds.


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About the EconomistsEditorDr. Ira KalishDeloitte ResearchDeloitte Services LPTel: +1 213 688 4765E-mail: [email protected]

Dr. Ira Kalish is Director of Global Economics at DeloitteResearch. He is an expert on global economic issuesas well as the effects of economic, demographic andsocial trends on the global business environment.

Managing EditorRyan AlvanosDeloitte ResearchDeloitte Services LPTel: +1 617 437 3009E-mail: [email protected]

ContributorsPralhad BurliDeloitte ResearchDeloitte Services LPIndia Tel: +91 40 6670 1886E-mail: [email protected]

Additional Resources

Deloitte Review Issue 11

From mad man to superwoman: The inevitable rise of the chief marketing ofcer in the ageof the empowered customer.

Cloud wars: How incumbents can respond to cloud disruption.

The engagement economy: How gamication is reshaping businesses.

The Ito factor: In the digital startup world, Joi Ito is a bona de rock star, but the outspokenentrepreneur faces his biggest challenge yet in revitalizing MITs venerable Media Lab.

Pulling ahead vs. catching up: Trade-offs and the quest for exceptional protability.

Global Economic Outlook Q4 2012

Eurozone, United States, China, United Kingdom, Japan, India, Russia, Brazil, Korea.

Please visit www.deloitte.com/research for the latest Deloitte Research thought leadership orcontact Deloitte Services LP at: [email protected].

For more information about Deloitte Research, please contactJohn Shumadine, Director, Deloitte Research, part of Deloitte Services LP,at +1 703.251.1800 or via e-mail at [email protected].
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Dttl Dr Apeconoutlook Dec2012

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