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Household spending to offset Euro cutbacks
26-07-2010
ATI June/July 2010 issue
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HONG KONG — Asian household consumption, excluding Japan, expanded by US$170 billion last year — compared with US$30 billion in the United States — says HSBC’s Co-Head of Asia Economic Research, Frederic Neumann.
While it is hard to argue against the fact that emerging Asia, including China, accounted for a total of just US$4 trillion in consumer spending — against US$10 trillion spent by US consumers — the value of consumption in Asia grew much faster than in the US.
Consumption is growing at 18 per cent year-on-year in China in nominal terms, and India is also growing at a double-digit rate. Southeast Asian consumption has grown strongly.
Taken together, Asian consumption will help offset the cutback in demand in Europe, Neumann says. “And if the US remains on course in its recovery, you have two regions of the world with strong consumption spending.”
Neumann says growth in consumption is driving intra-Asian trade. He points to electronics as an example, saying that the market tends to be extremely sensitive to demand in the US, which remains the largest consumer of electronics in the world. “US sales are roughly 10 per cent below their peak of 2007, yet global electronic sales are reaching new high levels,” he told ATI.
Neumann says more handsets, flat screen TVs and cars are now being sold in China. “More air passenger miles are being flown in China than in the US. We can see a lot of incremental trade going from Taiwan and Korea to China — and those shipments are staying in China.” Plants in these countries are running at full capacity and need to invest urgently to increase capacity. The reason, he says, is that the slack has been taken up by China, India and smaller markets like Hong Kong.
“Clearly, growth has decoupled — but not monetary policy,” says Neumann. “Asia is importing extremely loose monetary policy from the West – and that is over-stimulating local demand. The big test for Asia is continuing growth if it starts to raise interest rates and to tighten monetary policy when the West does not.”
Neumann says both India and China are experiencing overheating, and that central banks in Singapore, Malaysia and China should start to raise rates. India has lifted rates by 25-50 basis points, but “nowhere near enough”.
He is concerned that, scared by events in Europe, Asian governments might delay winding up stimulus, which could further heat their economies.
“Currently, the US looks better than Europe, he says. One of the advantages the US has over the EU is that the Americans drive reform aggressively. The US has cleaned up the balance sheets of its banking sector, and restructured industries like its car sector. General Motors and Chrysler were taken over and restructured. They have emerged much leaner.
“The EU has three challenges. It needs to cut back on fiscal stimulus, and, like the US, restructure its car companies. It faces the massive challenge of cutting back on Government programmes like social security and pensions. And banks in Europe have become risk-averse and reluctant to lend.” The trillion-dollar rescue package for Greece has stabilised the situation in Europe, he says, but coming months will remain uncertain because of market concerns.
“Everywhere you look, there are going to be some policy uncertainties.” Neumann says the market is wary of sudden and unpredictable changes to regulation as proposed by national governments in the US, UK, Europe and even China — and global groups such as G-20.
“The next several months could be quite volatile. The UK has a new government and the US has proposed a major reform bill (on the banking sector), while the EU has started with regulatory reform. The G-20 is also working on regulatory reform. These reforms are being proposed at a time when a lot of risks and uncertainty remain.” However, he believes that by September or October, the global economy will improve. HSBC sees a slight deceleration next year, with China slowing to 8.9 per cent growth, and India to 7.5 per cent. |
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