Asia Pacic Economic Outlook

December 2012

China Japan Malaysia Thailand

China

Chinese economic growth is nally accelerating after experiencing a substantial slowdown during the past year. A rise in government-funded investment helped to offset the considerable weakness in exports to Europe. Interestingly, exports to other geographies have actually improved. In October, overall exports were up 11 percent from a year earlier, signicantly exceeding expectations. This, in turn, contributed to a 9.6 percent increase in industrial production in October, offering the prospect of stronger GDP growth in the fourth quarter. In November, a private sector purchasing managers index for manufacturing moved into positive territory for the rst time since July and indicated the fastest rate of growth in the sector in more than a year. In October, retail sales growth accelerated from September, suggesting that the consumer sector is improving as well. Thus, it appears that China is on the mend. Moreover, with prices up a mere 1.7 percent in October compared to a year earlier, consumer price ination decelerated substantially, reaching the lowest rate of ination in 33 months. This means the central bank has considerable wiggle room if it chooses to further ease monetary policy in order to stimulate the economy.

However, although growth is showing signs of revival, China still faces some challenges. For example, foreign direct investment (FDI) into China declined in October for the 11th time in the last 12 months. Slowing growth in China, weakness in the global economy, a rising currency, rising wages, and political uncertainty are all likely reasons for the deceleration of inbound investment. For the rst 10 months of 2012, inbound FDI was down 3.5 percent from 2011. Outbound investment from China, however, increased strongly. In the rst 10 months of the year, outbound FDI was up 25.8 percent from 2011. This suggests that Chinese companies are actively searching for resources and for new opportunities around the world. Chinas highervalued currency means that foreign assets are relatively cheaper. Recent weakness in commodity prices probably makes commodity-production resources cheaper as welll. Challenges for new leadership Turnover in Chinas political leadership raises questions about the likely path of government policy and how the new leadership is likely to tackle longer-term economic challenges. Interestingly, outgoing Chinese President Hu Jintao recently said that China should plan to double per

Asia Pacic Economic OutlookDecember 2012

Turnover in Chinas political leadership raises questions about the likely path of government policy and how the new leadership is likely to tackle longer-term economic challenges.
capita GDP from 2010 to 2020; this goal may be realistic if Chinese economic growth doesnt slow down. This will likely require signicant reforms aimed at maintaining long-term growth in the face of challenging demographics. Hu hinted at reforms by calling for the private sector to have equal access to factors of production. Hu also called for improving the ability to innovate and for a boost to domestic demand. Equal access for the private sector is signicant. Today, state-run businesses have favorable terms of credit, thus frequently limiting credit to privatesector businesses, especially smaller ones that must pay very high rates of interest in the informal credit sector. Reformers want to free-up market interest rates that are currently set by the central bank and allow all borrowers to compete freely for credit. Hus evident support for this measure could presage considerable reform of credit markets. However, doing so will likely have the effect of reducing the prot margins of state-run businesses. Another issue is the necessity of shifting away from export-led growth toward consumer-led growth. Rising wages are already helping to make this happen. For example, in the past three years, the wages of Chinas migrant workers increased 56 percent. Yet, exporters have mostly not passed on this cost increase to their customers. The prices of US imports from China rose only 4 percent in the last three years. Absent huge productivity gains, this pattern cannot be sustained indenitely as it would ultimately mean disappearing prot margins. Rather, export growth will likely decline, and with big wage increases, consumer spending in China should grow faster. Market-opening reforms can help to accelerate this change in Chinas economic structure.

Asia Pacic Economic OutlookDecember 2012

Japan

The Japanese economy appears to have entered a recessionary phase. In the third quarter, Japans GDP declined 0.9 percent over the previous quarter. This represents an annualized decline of 3.5 percent, and the economy may also contract in Q4 2012. A dip in exports to Europe was accompanied by weaker exports to 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 rst time since mid-2009. However, a faltering economy is only part of the story. The central banks monetary stance and political transitions will likely attract more attention in the coming months. The possibility of a change in political leadership following the general election in December is heightening policy uncertainty. The main factor contributing to GDP contraction was a drop in exports. Net exports shaved nearly 0.8 percent from GDP in Q3 2012 as nominal exports ebbed in 10 of the past 13 months. October marked the fth consecutive monthly decline wherein exports dropped by 6.9 percent. Meanwhile, higher demand for fuel has increased the import bill, and Japans trade decit has remained in negative territory. Territorial disputes with China have made matters worse. In October, sales of Japanese-brand passenger cars were down 38.2 percent over the previous

month and down a staggering 59.4 percent year-overyear. However, trade ministers from China, Japan, and South Korea have initiated discussions for a trilateral free-trade agreement. The talks, if successful, will likely create one of the worlds biggest free-trade zones. The Japanese government lowered its view of the economy for the fourth consecutive month. Weak corporate spending was one of the main factors for the downward assessment. The government is also pessimistic about bankruptcies, the employment situation, and corporate 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 majority to the opposition Liberal Democratic Party (LDP) in the general election scheduled for December 16, and Shinzo Abe may become the countrys new prime minister. Mr. Abe has promised additional stimulus to revive the economy, and he called for an even more aggressive monetary intervention by the central bank. Some experts believe that Mr. Abes stance on reforming the Bank of Japan (BoJ) law to make the central bank more accountable to the government could impinge on the independence of the central bank. While changes to the BoJ law will be difcult to implement, the next government

Asia Pacic Economic OutlookDecember 2012

While monetary policy could play a major role in Japans recovery, the central bank has not been able to deliver on its targets.
will nominate up to three new members of the ninemember board of governors, including a replacement for the current governor. As a result, the LDP could exert signicant inuence on future monetary policy. Meanwhile, the BoJ decided to keep its monetary policy unchanged in its meeting on November 20. Interest rates were held at between 0 and 0.1 percent, and the size of the asset purchase program was not increased. After two consecutive months of easing, the BoJs monetary stance was in line with expectations. Moreover, the BoJ might face increased political pressure to adopt aggressive monetary expansion, following the general election in December. As a result, the central bank might have preferred to hold back on its limited policy options during this meeting. The BoJ has expanded its monetary stimulus four times this year by increasing the size of its asset purchase program to $1.2 trillion. While monetary policy could play a major role in Japans recovery, the central bank has not been able to deliver on its targets. Japan continues to face a deationary environment, and the BoJs target of 1 percent ination is unlikely to be achieved this year. Moreover, the BoJ remains weary to the risk of a rise in the value of the yen amid unlimited quantitative easing by the US Federal Reserve. Yet, much of the onus of supporting the economy might fall on the BoJ.

Asia Pacic Economic OutlookDecember 2012

Malaysia

Malaysias GDP growth exceeded market expectations in Q3 2012, rising 5.2 percent over the previous year. Moreover, GDP growth for Q2 was revised up to 5.6 percent from the previous estimate of 5.4 percent. Malaysias strong performance comes as a surprise amid broad-based weakness among its regional peers. Domestic demand offset the externalsector drag on economic growth and rose at a healthy 11.4 percent in the JuneSeptember period. However, both domestic demand and private consumption experienced slower growth compared to the previous quarter. Yet, Malaysia is expected to achieveor even exceedits 2012 growth estimate of 5 percent. Better labor market conditions, government cash handouts, and payments to civil servants boosted private consumption expenditures. In addition, capital spending also registered a strong performance and rose by a staggering 22.7 percent over the previous year. Public and private sector capital investment in the transportation, oil and gas, and utilities sectors propelled capital investments during Q3 2012. Investment growth of this magnitude augurs well for the Malaysian economy and could potentially result in higher growth rates for the economy in the coming years. However, investment growth levels of over 20 percent are unlikely to continue in 2013.

Meanwhile, total vehicle production grew 4.6 percent in October compared to the previous year. Production of both passenger and commercial vehicles registered an increase. Furthermore, new vehicle sales were up 3.2 percent year-over-year, and up 1.9 percent from the JanuaryOctober period in 2011. In addition, agricultural sector growth inched into positive territory in Q3 2012, owing to a recovery in palm oil production. The construction sector remained robust, and services growth was supported by strong domestic demand. On the other hand, economic activity in manufacturing was weighed down by weak external demand, and the mining sector contracted due to a drop in gas production. Malaysias current account surplus ebbed slightly during the third quarter. The surplus on exported goods was offset by a decit on income payment and services. Furthermore, the nancial account experienced a net outow as outward foreign portfolio investments and direct investments abroad outpaced inows. As a result, the overall balance of payments recorded a decit of nearly $2.5 billion in Q3 2012. Although exports surprised on the upside in September, export growth has been relatively muted this year. Export growth was supported by modest increases in exports to Singapore, Indonesia, and the United States while demand from Europe fell.

Asia Pacic Economic OutlookDecember 2012

The construction sector remained robust, and services growth was supported by strong domestic demand.
The current trend will likely continue till the end of the year, but exports are expected to recover in 2013. The annual rate of consumer price ination stood at 1.3 percent in October, unchanged from September. This also represents the lowest rate of ination since November 2009. Food price ination moderated from 2.4 percent in September to 2.0 percent in October. However, the non-food component of the index rose 0.3 percent to reach 1.1 percent. Price pressures remain subdued, but ination might have bottomed-out. The governments subsidy-rationalization program and the introduction of a general sales tax could result in higher ination in the coming months. Moreover, the sustained expansion in domestic demand could also lead to an uptick in ination. Downside risks to Malaysias growth are likely to emanate from weak economic conditions in Europe and the United States. Robust domestic consumption emerged as the main driver of growth in an economic framework that is heavily dependent on exports. In all likelihood, Malaysias growth momentum will continue through the fourth quarter of 2012, despite uncertainties in the export sector.

Asia Pacic Economic OutlookDecember 2012

Thailand

Robust domestic consumption bolstered Thailands economy during the third quarter of 2012. After growing at 3.3 percent in the second quarter, Thailands GDP growth came in at just 1.2 percent in Q3 2012. Private consumption grew by 6.0 percent over the previous year and shielded the economy from external headwinds. Moreover, higher investments and government stimulus policies compensated for a decline in exports. Although the third-quarter performance exceeded expectations, key economic indicators signal a deceleration from the previous quarter. As a result, the National Economic and Social Development Board lowered its 2012 GDP growth forecast to 5.5 percent. Meanwhile, the Bank of Thailand (BoT) kept its 2012 growth forecast unchanged at 5.7 percent but lowered its projection for 2013. Downside risks persist, and the Thai economy will remain vulnerable to the external environment. Thailands growth decelerated in Q3 2012 largely due to a drop in exports. Economic weakness in the United States and China dragged Thai exports down 1.2 and 11.8 percent, respectively. Furthermore, Thailands exports in October rose less than expected. In October 2011, a ood battered the Thai economy, and economists expected exports 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, but exports to China declined. While exports in November and December are expected to be robust primarily due to base effects, the BoT lowered Thailands export growth forecast for 2012 from 7.0 percent to 4.4 percent. The automobile sector staged a remarkable recovery as 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 ve times from the same period last year. Tax incentives for rst-time buyers pushed demand and resulted in higher production. Furthermore, an uptick in production was accompanied by a rise in vehicle exports. While monthover-month export growth was relatively at, exports were up 79.7 percent over the previous year. A strong performance in the automobile sector could boost economic activity. However, industrial condence ebbed for the fth consecutive month in October. Concerns over the health of the global economy and higher operating costs weighed down the sentiment. The index came in at 93.0 in October, down from 94.1 in September and 98.5 in August 2012. A reading below 100 indicates pessimism.

Asia Pacic Economic OutlookDecember 2012

Private consumption grew by 6.0 percent over the previous year and shielded the economy from external headwinds.
Meanwhile, Thailands cabinet approved a proposal to impose the minimum wage of 300 baht per day all over the country beginning January 1, 2013. Employer costs are likely to increase by 1015 percent, owing to the wage hike. The Federation of Thai Industries (FTI) is likely to propose to the government certain measures that will limit the impact on the private sector. The FTI suggested the establishment of a wage differential compensation fund to help small and medium-sized rms handle the rise in wages. If the government agrees to the proposal, its scal bill may rise substantially in the coming year. Moreover, some experts believe that the policy will have no positive outcome for the industry because worker productivity is unlikely to increase, given the skill decit. In addition, it is also possible that some companies may relocate operations to other countries in order to reduce costs. Contributions from reconstruction-related spending supported the recovery until now, but they will likely recede. While the economy is expected to grow by 15 percent over last year in Q4 2012, the growth will be largely due to low base effects. With year-over-year comparisons skewed by the 2011 ood, it will be difcult to ascertain the real momentum of the economy going into 2013.

Asia Pacic Economic OutlookDecember 2012

About the Economists

Editor Dr. Ira Kalish Deloitte Research Deloitte Services LP Tel: +1 213 688 4765 E-mail: ikalish@deloitte.com Dr. Ira Kalish is Director of Global Economics at Deloitte Research. He is an expert on global economic issues as well as the effects of economic, demographic and social trends on the global business environment. Managing Editor Ryan Alvanos Deloitte Research Deloitte Services LP Tel: +1 617 437 3009 E-mail: ralvanos@deloitte.com Contributors Pralhad Burli Deloitte Research Deloitte Services LP India Tel: +91 40 6670 1886 E-mail: pburli@deloitte.com

Additional Resources

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Contact information
Chinese Services Group Leaders Global Chinese Services Group Lawrence Chia Deloitte Touche Tohmatsu CPA Ltd China Tel: +86 10 8520 7758 E-mail: lawchia@deloitte.com.cn U.S. Chinese Services Group Timothy Klatte Deloitte Touche Tomatsu China Tel: +86 21 61412760 E-mail: tiklatte@deloitte.com.cn

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U.S. Industry Leaders Banking & Securities and Financial Services Robert Contri Deloitte LLP USA Tel: +1 212 436 2043 E-mail: rcontri@deloitte.com Consumer & Industrial Products Craig Gif Deloitte LLP USA Tel: +1 216 830 6604 E-mail: cgif@deloitte.com Health Plans and Health Sciences & Government John Bigalke Deloitte LLP USA Tel: +1 407 246 8235 E-mail: jbigalke@deloitte.com

Power & Utilities and Energy & Resources John McCue Deloitte LLP USA Tel: +216 830 6606 E-mail: jmccue@deloitte.com Telecommunications, Media & Technology Eric Openshaw Deloitte LLP USA Tel: +1 714 913 1370 E-mail: eopenshaw@deloitte.com

Asia Pacic Industry leaders Consumer Business Yoshio Matsushita Deloitte Touche Tohmatsu Japan Tel: +81 3 4218 7502 E-mail: yomatsushita@tohmatsu.co.jp Energy & Resources Adi Karev Deloitte Touche Tohmatsu LLC Hong Kong Tel: +852 2852 6442 E-mail: adikarev@deloitte.com.hk Financial Services Karen Bowman Deloitte & Touche LLP Hong Kong Tel: +852 2852 6786 E-mail: kbowman@deloitte.com.hk

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