Insight archive for David Mann | Standard Chartered

Emerging Asia is the present and future for growth

David Mann — Tue, 27 Aug 2019 09:49:03 +0000

A recent article in the Financial Times questions the attractiveness of investing in emerging markets, citing their poor growth performance. The key message was that excluding India and China, EM-30 countries have seen slower per-capita GDP growth on average than advanced economies since 2015, and they face rising risks from a trade slowdown and high leverage.

This tailored story exists because, over this period, GDP has been weak across many well-known emerging economies including Argentina, Brazil, Mexico, South Africa and Nigeria. But this story does not hold up for Eastern Europe, the rest of sub-Saharan Africa and emerging Asia (even excluding India and China).

"If investors want exposure to global growth, they need to invest in companies that are doing business in emerging Asia"

Emerging Asia has the strongest fundamentals of all emerging market regions and is too important a part of global growth for investors to ignore.

We break down our view into three parts:

1. Emerging Asia accounts for two-thirds of global growth currently

The world’s middle class is at a tipping point – by 2020, a majority of the world population will be classified as middle class or above, according to the Brookings Institute. Asia will lead the increase in middle-class populations, as those in the West stagnate. The domestic consumption story is compelling. We forecast global growth at 3.4%. Without emerging Asia’s contribution, it would be closer to 1.1%, the weakest performance in decades (with the exception of 2009).

Even excluding China and India, emerging Asia’s contribution to world growth today already exceeds that of the US and is three times the size of the euro area.

2. A domestically driven story

While growth in advanced economies has disappointed in the past decade, Asia’s growth has met even our high expectations. The region’s outperformance reflects its reduced growth dependence on Western economies and its boost to domestic demand instead. China-ASEAN has been one of the world’s fastest-growing trade corridors. Asia’s rising middle class will offer a growing pool of consumer demand to counter the weakening trend in the West for many years to come. A growing middle class will also mean greater south-south or intra-EM trade.

3. Some Asian economies’ growth may double every decade as Developed Markets stagnates

In a world of stagnating growth, the contrast with emerging Asia stands out. We expect selected Asian economies to grow by at least 7% in the coming years – roughly the pace at which an economy can double in size every decade. The region’s likely ‘7 per cent club’ members in the 2020s include India, Bangladesh, Vietnam and the Philippines.

In 2019, China surpassed Japan to become the world’s second-largest capital market. Today, a quarter of the world’s fixed income universe is negative yielding. The push and pull factors exist to attract more investors to emerging Asia. Why would investors walk away from the most dynamic economies in the next few decades?

"For them (South Asia), threat from rising anti-globalisation sentiment and the increase in factory automation are key concerns"

The risks for emerging Asia

There are risks to the growth outlook, however.

Ageing populations in advanced economies and some Asian economies will increasingly weigh on global growth. However, the growing global middle class is likely to at least partically offset this demographic drag.

Countries in South Asia still enjoy a demographic dividend. For them, the threat from rising anti-globalisation sentiment and the increase in factory automation are key concerns. However, the world is turning more services-oriented, with the services sector now accounting for around 65% of total world GDP – and countries that focus on upgrading skills will have an edge. Malaysia, the Philippines and Indonesia are doing well on skills indicators, while India, Thailand and countries need to focus more on this.

Productivity growth will be a key differentiator across economies, and it is directly linked to reform momentum. Countries such as the Philippines, Indonesia, Bangladesh and India have seen a pick-up in the pace of reforms and productivity growth, while Sri Lanka will have to do more on both fronts.

In the short run, global liquidity conditions are set to ease. The growing dovish wave among major central banks will likely start to weigh on the USD. A renewed hunt for yield by investors will favour emerging markets that offer the right mix of reforms and productivity growth. Emerging Asia has the strongest fundamentals of all emerging-market regions and dominates world growth. Investors cannot ignore it.

Could a trade war derail global growth?

David Mann — Thu, 05 Apr 2018 13:51:43 +0000

We are cautiously optimistic about global growth in 2018 and beyond.

While economic fundamentals look good, tail risks from global politics are rising. President Trump’s determination to press ahead with parts of his populist agenda could undermine the global trade framework that has been in place for decades. So far, aggressive words have not been matched by equally draconian actions, and the damage has been limited. But this is changing as US mid-term elections in November approach.

President Trump’s decision to impose tariffs on up to USD60 billion of goods from China in response to alleged misappropriation of US intellectual property is a potential path to a full-blown US-China trade war, which could be more damaging to the US economy today than would have been the case 10-15 years ago. One in five jobs in the US today is related to international trade.

Previous episodes of protectionism have shown that the US has suffered because of its own policies: it has led to net job losses, saving jobs in protected sectors while losing jobs in other sectors; rather than reducing imports, it has replaced one supplier with another; and it has worsened income inequality.

"The US is the fourth-largest consumer of its own exports via global supply chains. Reducing imports would likely hurt US companies"

The US is highly integrated into global supply chains, importing a significant amount of material that has high US value-added content. By our estimates, the US is the fourth-largest consumer of its own exports via global supply chains. Reducing imports would likely hurt US companies.

If targeted imports from China are simply replaced with goods from other countries – at higher prices than pre-tariff China-made goods – the impact will likely be inflationary for the US. The main competitors for US trade are China, Mexico, Germany and Japan, which fiercely compete, so measures against one would benefit the others.

Tough stance could be a negotiating strategy

While a trade war could be highly disruptive, markets may be right in staying sceptical about the chances of the worst-case materialising. What if all of this bad news for world trade prospects is just an extreme starting position in a negotiating strategy, following the playbook from Trump’s book The Art of the Deal?

For example, in President Trump’s approach to North Korea, a surge in aggressive rhetoric sharply raised tensions, followed by a sudden shift in the opposite direction. In May, we will see an unprecedented meeting between North Korean leader Kim Jong Un and President Trump. What if something similar happens in US-China trade relations, where both sides feel they have made a win-win deal?

"While global growth may power on for now, we remain uncomfortable about US disengagement "

WTO position is weakening

Nevertheless, even if we end up seeing more trade than before, as China purchases more goods and services from the US to help narrow the current account deficit, there may still be longer-term casualties from the extreme starting position in the negotiations. The March announcement of steel and aluminium tariffs was not done under a recognised WTO (World Trade Organisation) process. Instead, national security was cited as the basis for tariffs. Responses from targeted countries this time also risk falling outside of the normally recognised process, undermining the WTO’s role as an effective dispute resolution institution.

The US is blocking appointments to fill three vacancies on the seven-member appellate body that ultimately rules in WTO trade disputes. A fourth vacancy will need to be filled in September. Blocking these appointments effectively paralyses the WTO’s global trade dispute mechanism; EU Trade Commissioner Cecilia Malmström says such moves risk ‘killing the WTO from inside’.

So, while global growth may power on for now, we remain uncomfortable about some of the longer-term damage that US disengagement is doing to key institutions that help to secure global growth and world trade. The fact that world growth has improved despite rising tail risks does not mean that we should relax.

Important disclosures regarding content from Standard Chartered Global Research can be found in the Global Research Terms and Conditions.

2018 expectations: beware of the dog

David Mann — Mon, 08 Jan 2018 12:23:30 +0000

2018 is likely to be another good year for global growth, with the world economy expected to expand by 3.9 per cent, up from 3.7 per cent in 2017.

The US and euro area are enjoying robust business and consumer confidence, and both are likely to exceed 2 per cent growth in 2018, similar to in 2017. Asia excluding Japan should once again be the fastest growing region in the world at 6.1 per cent. We expect growth to be up from 2017 levels in the Middle East and North Africa region (rising to 2.9 per cent), while Africa and Latin America should continue to recover from 2016 lows, expanding by 3.4 per cent and 2.4 per cent, respectively.

"This is no time for complacency. Growth is still below the 4.2 per cent average seen in the 10 years before the global financial crisis"

While this is encouraging, this is no time for complacency, especially as growth is still below the 4.2 per cent average seen in the 10 years before the global financial crisis.

Emerging markets face looming risks, and these are not merely geopolitical. In the Year of the Dog, ‘barks’ could easily become ‘bites’.

Monetary easing ends

We expect the Federal Reserve (Fed) to hike its interest rate twice in the first half of 2018, taking it to 2 per cent by the end of June. We see a risk of a third hike in the second half of 2018. If the Fed were to be even more aggressive than we expect, this could reduce flows into emerging markets. But perhaps even more important than the Fed in 2018 are the European Central Bank and the Bank of Japan.

In the past two years, central banks of the major, advanced economies have continued to expand their balance sheets significantly – even after the Fed ended its quantitative easing programme in 2014. But now the most aggressive monetary easing experiment in living memory is about to end. This should start to affect markets and the global economy by the second half of 2018, when aggregate balance-sheet expansion is due to slow to a quarter of its current annual run rate.

We think central bank balance sheets will begin to shrink outright in 2019, making it harder for markets to shrug off bad news. In this case, if the bark turns into a bite, it could be painful.

"Major central bank support for growth and the markets will likely fade fast, starting from the second half of 2018"

Asian exports come under pressure

Global trade could deliver a second potential bite. In 2017, strong Asian exports were buoyed by two temporary factors: recovering export prices and China’s inventory restocking cycle. Both are likely to fade this year. The good news is that electronics producers, mainly in North East Asia, should continue to benefit from the structural rise of the internet of things.

China’s boost for emerging markets

In China, growth is likely to continue to soften in 2018 but remain on track to achieve the target of doubling 2010 real GDP by 2020. But risks from prior leverage growth excesses continue. Growth and productivity have suffered for years under the weight of excessively leveraged state-owned companies. We expect little change on this in 2018, while innovative and less leveraged sectors should grow strongly. Deleveraging efforts underway should help to reduce risks in the longer term, although the complex nature of the financial system remains a challenge. China’s economy will likely be a tale of old, slow growth, excessively leveraged sectors versus the faster growing new services industries, which are boosting consumer spending.

While China’s households are experiencing rapid credit growth, this is from a low base and is unlikely to pose a risk for the next three to five years. In fact, China’s household spending may increasingly benefit other emerging markets, not just via tourism but also as China rivals the US as a services and consumer-led economy in the coming years.

Inflation pressures in China

We expect a significant increase in China’s Consumer Price Index (CPI) inflation, to 2.7 per cent in 2018 from 1.6 per cent in 2017. Our forecast, among the highest in the market, where the consensus view is 2.2 per cent, is based on several factors. The softness of the CPI in 2017 was mainly driven by food deflation, which is rare in China’s history. Recent data suggests that food price increases have normalised. Also, there are early signs that higher producer prices are being passed on to consumers.

Finally, the services sector has become a stubborn source of inflation, surpassing 3 per cent in recent months. The need to contain inflation could mean that policymakers are more tolerant of tighter financial conditions, including keeping the renminbi steady to slightly stronger on average against a basket of major currencies in 2018.

"As funding costs rise, it will be harder for investors to ignore bad news"

In the Year of the Dog, with consensus predictions so focused on the strength of the global economy, we stress the need to remain wary of risks, and not just the geopolitical ones. Major central bank support for growth and the markets will likely fade fast, starting from the second half of 2018. Asia’s export strength in 2017 will likely ease. As funding costs rise, it will probably be harder for investors to ignore bad news.

Important disclosures regarding content from Standard Chartered Global Research can be found in the Global Research Terms and Conditions.

Asia leverage – after the boom

David Mann — Fri, 01 Apr 2016 12:02:09 +0000

In a year of lacklustre world growth, and despite the region’s great openness to trade, Asia’s GDP growth continues to outperform impressively.

The main factors behind this outperformance, which has been going on since the global financial crisis, have been strong intra-regional trade and domestic demand. Another crucial factor has been growth in borrowing – or leverage.

Some Asian economies have experienced excessive credit growth in certain sectors in recent years. Now that the region’s credit boom is over, companies and governments are dealing with the consequences of past excesses.

In 2016, Asia finds itself in a consolidation phase, as credit growth slows, but that doesn’t mean the problems are over.

"China’s ratio of total debt to GDP may keep rising, albeit at a slower pace"

China remains the biggest concern in Asia when it comes to leverage. While the rate of increase has peaked, China’s credit growth may continue to exceed GDP growth. This means that China’s ratio of total debt to GDP may keep rising, albeit at a slower pace.

China’s debt-to-GDP ratio has increased by 85 percentage points to 232 per cent since the end of 2008, in the wake of the government’s massive stimulus programme to counter the effects of the global financial crisis.

While China’s ratio of bad debt to GDP appears much lower now than in 1997, the issue is more complex this time. Bad debts are not concentrated with large state-owned companies and banks; they now extend to small and medium-sized enterprises (SMEs) and smaller-scale banks.

This file opens in a new windowDownload the report

The contingent liabilities of local government financing vehicles are another potential risk. Off-balance-sheet transactions and so-called ‘shadow banking’ activities (consisting mostly of wealth management products) are seen as raising credit risks and destabilising financial markets.

China’s policy makers are well aware of rising credit risk in the financial system as a result of the economic slowdown. They have implemented several policies to mitigate such risks: the recent recapitalisation of policy banks to provide new loans to boost growth, the use of existing national asset management companies (and the creation of new local ones) to take on bad debts, the debt-to-bond swap, and capital-market development.

Other options being discussed include securitisation of bank assets and a debt-to-equity swap. We think a direct government bailout would be a last resort.

Asia’s leverage risk varies from high to low

We group Asian economies into three in terms of leverage-related risks (high, medium and low), and China – along with Japan, Hong Kong and Malaysia – are in our high risk category.

India and Singapore remain in our medium-risk category, joined by South Korea (previously in the high-risk category) and Indonesia (previously low-risk). While India’s overall debt remains fairly low, at only 138 per cent of GDP, the risk profile of existing debt has deteriorated, particularly in the past two years.

We flagged India’s corporate debt as a concern back in 2013 due to its rapid accumulation. Weak profitability, combined with debt concentration in the commodity sector, has further increased risks in the corporate sector.

Corporate debt has deteriorated after commodity price drop

Indonesia’s move from the low-risk to the medium-risk category reflects a deterioration in corporate debt – particularly in the commodity space after the slide in commodity prices over the past two years – as well as an increase in external debt, a large portion of which is foreign-currency-denominated.

Taiwan, Thailand and the Philippines remain in the low-risk category. All three have plenty of room to expand leverage, particularly in the private sector. While the Philippines’ household credit growth has far exceeded income growth in recent years, credit growth is coming from a very low base – the country’s total household debt is by far the lowest in Asia. A continued, but contained, increase in household leverage would help to sustain the recent strength in consumer demand, a significant contributor to GDP growth.

"A bright spot in Asia’s leverage landscape is that the household sectors in China, India and Indonesia all have room to increase leverage"

Thailand’s government and corporate debt remain very low, with scope for further leverage to boost growth. Household leverage remains a concern, however, given the high debt-to-income ratio and the relatively high household debt-service ratio. Bank credit to households needs to be monitored closely, particularly in case of a weak economic recovery.

Generally, Asia is divided in terms of household leverage risk. While households in Malaysia, South Korea, Australia and Singapore are highly leveraged, those in other parts of the region – particularly China, India and Indonesia – have significant room for more borrowing.

A bright spot in Asia’s leverage landscape is that the household sectors in China, India and Indonesia – Asia’s largest emerging economies – all have room to increase leverage, helping them to cope better with shocks and boosting their consumption power. This should help Asia’s external sector become even less dependent on the West than it is today.

Important disclosures regarding Standard Chartered Global Research can be found in the Global Research Terms & Conditions

Who matters the most for growth in Asia?

David Mann — Wed, 09 Dec 2015 09:27:44 +0000

Economic ties around the world are evolving fast, even during the current period of relatively sluggish global growth. For Asia – the world’s most open region to trade – the question of which of the major economies matters most for external sector growth is critical.

If we just look at which economies dominate global growth, back in 2000, the answer to this question was clearly the US, and particularly the US consumer. The US economy accounted for a quarter of global GDP growth. Meanwhile, China accounted for just 7 per cent of world growth, despite its rapidly growing economy.

"China dominates because its economic scale has increased, while its pace of growth remains well above that of the other major economies"

However, by 2014, the US share of global GDP growth had fallen to 16 per cent, whereas China’s contribution had risen to 30 per cent – despite the country’s slowdown.

China dominates because its economic scale has increased, while its pace of growth remains well above that of the other major economies. But does this large share of growth actually translate into being the most important driver in the Asia region?

US and euro area still big swing factors

We analysed the impact of four major economies – China, the US, the euro area and Japan – on 10 Asian economies: Australia, Hong Kong, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand. While China comes out as the biggest driver of economic activity, it is not by as wide a margin as you might think. We took two approaches to reach this conclusion.

First, we went to an alternative source to tell us who is really buying the goods exported by countries in Asia. We use data from the OECD, which calculates exports by ultimate destination (i.e. based on who is really buying the goods). Using this, the relative importance of the US and the euro area increases. This is likely due to the evolution of supply chains in the last 15 years, where goods go to various intermediate locations (i.e. China) first before ending up at their final destination.

This file opens in a new windowDownload the report

For seven of the economies in our study – Australia, Hong Kong, Malaysia, Singapore, South Korea, Taiwan and Thailand – the shares of their exports for end use in China are lower than official direct export data indices.

Second, we calculated how sensitivities to growth in the major economies have changed in the last decade. We estimated rolling betas for growth in each Asian country, explained by growth in each of the majors. We found that since 2011, China has risen in influence to the other.

We then modelled the reaction of each of the countries in the region to a 1 percentage point (ppt) GDP growth shock in each of the major economies. For the Asia ex-China and Japan region as a whole, the results were: US impact 0.28ppt, China 0.24ppt, euro area 0.35ppt and Japan 0.11ppt.

"While the bigger swing factors in our view come from the west in 2016, the overall impact on Asia’s growth will likely be negligible"

This means that if all four major economies accelerated their growth by 1ppt then the euro area would have the most impact on Asia. However, momentum requires both mass and velocity, something which China has above the others.

So what does all this mean for growth in 2016? We actually expect the bigger change in growth rates to come from the US and Europe. Our forecasts for growth in 2016 over 2015 are: US slowing, the euro area accelerating, Japan mildly accelerating, and China remaining steady at 6.8 per cent.

While the bigger swing factors in our view come from the west in 2016, the overall impact on Asia’s growth will likely be negligible. Our 2016 growth forecasts indicate that Singapore, Taiwan, Hong Kong and Malaysia will be the most negatively affected by demand from the majors in 2016.

While the economies of the US and the euro area are larger than China, China’s fast growth, combined with its bigger scale, means its impact on Asia is greater. Today, China is growing three times faster than the US and euro area. If all three economies saw a halving in their growth rates, the biggest impact by far would come from China.

Important disclosures regarding Standard Chartered Global Research can be found in the Global Research Terms & Conditions

This article first appeared in beyondbrics on 8 December 2015

Asia’s three counter-attacks against the pessimists

David Mann — Mon, 01 Sep 2014 23:00:27 +0000

Asia growth pessimists expect to score a hat trick against the optimists in 2014 and beyond. We disagree.

The bearish narrative goes as follows:

Excessive leverage growth has left the region’s economies over-stretched, meaning weak growth at best and a potential crisis at worst
Weak or negative productivity performance means soft growth and investment returns
Demand for Asian goods remains subdued despite the recovery in the West, so the external sector will not come to the rescue of the world’s most open region to trade

However, we think these negatives are overblown.

Leverage is stretched only in some economies and sectors

First, as with every story, there is more to Asia’s leverage story than what the headlines say.

Excessive leverage has been built up in pockets of some of the region’s economies, including corporates in China, Korea, Singapore and India, and households in Malaysia, South Korea and Singapore. In aggregate, however, we believe the challenges are surmountable.

China’s leverage is the most concerning to us based on a broad range of metrics, but debt is concentrated in the corporate sector and with local governments.

"Even in China, we do not expect a crisis. The process of dealing with prior excesses is likely to be manageable"

China’s household sector is in healthy shape and is set to benefit as ongoing wage growth, urbanisation and financial-sector development enable households to take on more debt, cushioning consumer spending against shocks.

India and Indonesia, the region’s next-largest emerging economies, have plenty more room to use leverage sustainably to boost the strength of the consumer.

Even in China, we do not expect a crisis. The process of dealing with prior excesses is likely to be manageable, as debt is concentrated in the state-owned and local government sectors rather than the household sector.

Monetary easing is already taking place, with the seven-day repo rate now averaging 3.4 per cent, well below its December-January levels.

Asia’s productivity has outperformed since 2000

Second, the perception that Asian economies are driven by capital accumulation, with zero or even negative productivity – defined as the rate of output per unit of input (capital and labour) – is outdated.

Asia’s productivity performance has been solid across the board since 2000. Even excluding China, the Asia-ex Japan (AXJ) region has outperformed other emerging markets in terms of productivity. This has been achieved even as the capital intensity of growth has declined in AXJ excluding China.

While the region’s productivity has slowed recently, this has been in line with the rest of the world, coinciding with the current soft patch in the global economy. We expect Asia’s productivity to rebound as the global growth cycle gathers pace. There is also room for reforms to boost the region’s productivity following many of the electoral cycles in 2014.

Exports to the West are improving

Third, we expect external demand to provide more of a boost to Asia’s growth in 2014-15 than in the past few years. We disagree with the notion that the US recovery is ‘importless’. The export pattern around the region so far in 2014 has been one of improving exports to the US and Europe.

The key point that gets ignored in the ‘importless recovery’ argument is that the US trade deficit excluding petroleum has been widening since 2010. This means that the US is having a positive impact on global growth outside of petroleum-producing economies, which include the majority of Asian countries.

"We expect the growth optimists to win out against the pessimists in 2014 and 2015"

US consumption is likely to gain positive momentum in 2014. Mortgage rates have fallen, which is a positive leading indicator for the housing market. Also, the US is only part of Asia’s external growth story. Europe was still in recession in 2013 and is likely to grow 1.3 per cent in 2014, based on our core scenario, helped by improving consumer spending.

How well China’s domestic demand holds up is more of a concern for markets in Asia. Asia’s broad export pattern so far in 2014 has been better demand from the US and Europe and soft figures for China. More stimulus measures in China in the second half of this year may counter the country’s engineered slowdown in credit growth.

We expect the growth optimists to win out against the pessimists in 2014 and 2015 as the global recovery improves and this should be good news for current account balances in the region.

The main risk to our view is if China scores an ‘own goal’ – in the form of a policy error – that causes a major growth driver of the region to stall. While this risk cannot be fully ruled out, there are already signs that Beijing is open to further policy easing to ensure the 7.5 per cent 2014 growth target is achieved.

Important disclosures can be found in the Global Research Terms & Conditions

Productivity in Asia – the new story

David Mann — Mon, 05 May 2014 23:00:22 +0000

The recent economic slowdown in Asia has fuelled investor fears that the region is back where it was two decades ago – stuck in the cycle of flat or falling productivity that sparked the crisis of the late 1990s.

However, this is very far from the truth. The fact is that since 2000, Asia’s productivity performance has been solid across the board, which was not the case in the 1980s or the 1990s.

"Asia is well placed to continue to grow faster than both developed and other emerging markets"

Productivity around the world, including in Asia, has slowed in the past few years, in line with more sluggish growth rates following the global financial crisis. But we expect global growth to pick up this year and strengthen further in 2015, and this should mean a revival in productivity.

Asia is well placed to continue to grow faster than both developed and other emerging markets, helped by rising productivity.

Undeniably, there are structural issues in Asia and need for reform, but – as shown in a new report by Standard Chartered Global Research – we believe that much of the slowdown in productivity since the global financial crisis has been down to cyclical factors which are now being reversed.

Investment and urbanisation to drive growth

It is also important to separate the China story from the rest of Asia. If you exclude Japan and China, the contribution of capital to GDP growth has been slowing in Asia for many years, while productivity growth has been sustained.

In China the contribution of capital is still rising, resulting in excess capacity in many sectors, while productivity growth has slowed.

Even so, China still has huge potential to use investment and urbanisation to drive strong growth in the coming decade, and the new leadership has demonstrated its appetite for reform, taking short-term pain for long-term gain. To put things into perspective, it is also worth noting that China’s capital stock (structures, equipment and machinery) per worker is only one-fifth of the US level.

"The demographic challenge facing many Asian countries in the coming years cannot be ignored"

Across Asia, urbanisation is set to be significant driver of productivity as agricultural workers shift into manufacturing and services. The newly urbanised workers will also need a higher-quality, productivity-enhancing capital stock.

An excessive focus on investing in residential property construction in Singapore and Hong Kong may help to explain why these economies have higher capital stocks per worker than the US, yet lag on productivity and were the region’s weakest performers on this metric between 2011 and 2013.

Shrinking working-age populations

The demographic challenge facing many Asian countries in the coming years cannot be ignored. All Northeast Asian economies, as well as Thailand and Singapore, face shrinking working-age populations by the mid-2020s, and some will reach this point as soon as the second half of this decade.

Illustrating the scale of the challenge, the UN estimates that from now to 2025, China’s working-age population will shrink by 15 million, nearly three-quarters of Australia’s population today.

From 2025-30, China’s working-age population will fall by another 20 million, and the country will need to find an extra 1.5 percentage point of GDP growth from other sources in order to compensate for its shrinking-working age population by 2025.

The demographic outlook is much more favourable in Southeast Asia. Indonesia and the Philippines are estimated to add a combined 35 million people to their working-age populations between now and 2025, according to the UN. This is equivalent to half of Thailand’s total population today.

Despite the demographic headwinds in many economies, we expect a recovery in productivity in the coming years, helped by urbanisation, reform and productive investment. Economies with still-low capital stocks per worker – China, India, Indonesia and the Philippines – have the strongest potential.

Views of the region are out of date

Ageing populations in Northeast Asia and Singapore will put more of a burden on urbanisation, infrastructure and reforms to boost productivity and growth.

But talk of long-term structural barriers to rising productivity in Asia – and fear that this may spark a new crisis – is based on an out-of-date view of the region and fails to take into account the huge steps forward taken in recent years.

Important disclosures can be found in the Global Research Terms & Conditions

This file opens in a new windowDownload the full report

2014 is a landmark year for global growth – and for emerging Asia

David Mann — Mon, 20 Jan 2014 00:00:38 +0000

Now that quantitative easing (QE) is coming to an end in the US, some say the emerging markets growth story is over. We disagree. In fact, the reasons why QE is ending are good news for emerging markets, especially emerging Asia, the region of the world most open to trade.

This is likely to be the first year of truly better growth for the world economy since the global financial crisis. We expect global GDP to expand by 3.5 per cent, with growth of 6.6 per cent in emerging Asia, 1.3 per cent in Europe, 7.4 per cent in China and 2.4 per cent in the US.

For the first time in years, all major economies are set to grow at a reasonable rate. The world economy is at long last gaining a more solid footing, with multiple drivers of growth.

"A new, more realistic and balanced, view of Asia is emerging among global investors"

This is good news for growth in emerging Asian economies, which have increasingly used leverage to support their domestic demand in the post-crisis years. While leverage has become stretched in pockets of some economies, there is little reason to expect this – or external events in 2014 – to lead to a crisis.

The region is not in a bubble, and there is no ‘miracle economy’ anywhere. A new, more realistic and balanced, view of Asia is emerging among global investors – one in which local markets do not out outperform year after year, regardless of the risks, and one where prices can adjust downwards when excessive optimism has crept in.

Many commentators are worried about the impact of higher global interest rates and tighter financial conditions on emerging markets, which have hitherto benefited from large inflows and easy financing conditions (since 2009, emerging Asia has seen gross inflows of about USD630 billion).

The sell-off we saw in emerging markets last year – when investors were anticipating QE tapering – were just the beginning, these commentators argue.

At Standard Chartered, we agree that monetary policy changes in the US are critical. By our estimates they are twice as important for global liquidity as the next most important central bank, the European Central Bank, which is twice as important as the next central bank, the Bank of Japan, which in turn is twice as impactful as the People’s Bank of China.

"Stresses in emerging Asia should be less pronounced than was the case in 2013"

At this point, however, unless inflation comes roaring back in the US, driven by a surge in credit growth – unlikely in our view – there is not a lot more left to be priced in for US rate hike expectations. For this reason, we believe the stresses in emerging Asia should be less pronounced than was the case in 2013. A key factor will be the timing of the rise in the short end of the US yield curve – something more likely to be an issue in 2015 than 2014.

While it’s true that money is no longer flooding into emerging Asia indiscriminately, this doesn’t mean that the structural story is over. In fact, clearer market signals will now be given to policymakers around the region that good policy – driven by growth-enhancing reforms – will be rewarded, and that complacency won’t. In other words, the fact that we’re coming out of the phase of indiscriminate inflows is a good, cyclical adjustment, not a cause of panic.

Current account balances should also start to stabilise in 2014, and this is another landmark point. The major reasons why we don’t foresee major problems for emerging Asia this year is that no country is likely to see a dramatic increase in inflation, and few economies are afflicted with current account deficits. In aggregate we expect a rise in emerging Asia’s current account balance over 2014.

The three economies in emerging Asia with current account deficits – India, Indonesia and Thailand – all happen to be holding elections this year. In Thailand the outlook is unclear and the longer the policy paralysis goes on the less likely it is that growth targets can be achieved. In India, coalition politics is the reality, and here we will be watching closely to see to how the reform agenda is prioritised after election. Indonesia, meanwhile, has already demonstrated its ability to go through the political cycle without it disrupting the sound economies policies that have been in place since the post-crisis reforms of the early 2000s.

Ignore the noise – Asia remains healthy

David Mann — Thu, 04 Jul 2013 23:00:11 +0000

There is an irony to the recent sell-off in emerging markets. It’s the result of a rare dose of uplifting news from the developed world: the US economy is showing enough strength to prompt the Federal Reserve to signal a paring back of its quantitative easing program.

In tumultuous times such as these we must look at the economic fundamentals to separate the ‘signal’ from the ‘noise’.

The key question today is: are the emerging markets fundamentally broken, or is this a brief phase where investors re-adjust their portfolios in light of the US recovery becoming more sustainable?

"It should not come as a surprise that economic reform, rather than economic stimulus, is all the rage in Beijing"

In Asia, the downward re-assessment of trend growth in China is seen as a potential trigger for a region-wide downturn. And rising debt levels among Asian governments, companies and consumers following the 2008-09 global financial crisis have raised concerns.

But how worried should we really be?

China is overseeing a soft landing

In China, the government is overseeing a so-called soft landing for the economy. Its aim is to restructure the economy from one which is driven by high levels of investment and exports to one driven by local consumption. China’s current model of growth has long been recognised as unbalanced, uncoordinated and unsustainable.

Therefore, it should not come as a surprise that economic reform, rather than economic stimulus, is all the rage in Beijing today. Policy makers have now set a 7 per cent annual growth target for the medium term. Unless there’s a significant deterioration in the economy, they are likely to focus on broader issues which include promoting urbanisation, fostering a level playing field for the private sector and upgrading social services such as education and health care.

So what of the concerns about debt levels across Asia?

A recent study by Standard Chartered shows the need for carefully nuanced analysis of this issue. Differentiation is vital; painting all of Asia with the same brush could lead to wrong conclusions.

Current leverage levels are broadly manageable

After years of rapid economic growth, Asia’s (excluding Japan) overall debt-to-GDP ratio has just reached the world average. However, our study of debt and solvency across corporate, household and government sectors in Asia demonstrates that current leverage levels are broadly manageable – with areas of concern and pockets where leverage can still rise to generate faster growth.

"Unlike most other major economies, China has sufficient financial means to inject capital and restructure its problem lenders"

China’s leverage is the most worrisome. However, the concern arises not from its overall credit-to-GDP ratio of 214 per cent, which places it only fifth among the Asian countries in our study. Rather, the concern is that debt is concentrated in the corporate sector.

The redeeming feature here is that the government has started to tackle this issue by slowing growth and curbing lending to industries facing overcapacity. In the event of a significant deterioration in the economy, problem loans are likely to surface and some banks may have to be recapitalised. But unlike most other major economies today, China has sufficient financial means to inject capital and restructure its problem lenders.

Household leverage is still low across most of Asia

There is also a longer-term positive story in Asia, which receives little attention, but will help the global economy to rebalance. Household leverage across most of Asia – particularly in China, India and Indonesia – remains low and has the potential for growth.
Indonesia’s credit expansion has recently accelerated, but the country still has a relatively low level of aggregate debt to GDP, giving it room to use leverage to boost growth. While India’s high government debt is a concern (which the authorities are addressing), household debt is relatively low. Taiwan’s total leverage is relatively benign.

In ASEAN (Association of South East Asian Nations) stresses are confined to household credit in some economies. Malaysia’s household leverage is high, as is Singapore’s on some metrics. However, the household sector in both countries has accumulated large liquid assets through mandatory savings. The Philippine economy – an outperformer in Asia – has plenty of room to expand its private sector leverage to boost domestic consumption and sustain growth.

Asia’s fundamentals are robust

Our study shows that while there are pockets of emerging concern, Asia’s fundamentals remain robust. Strong government and household balance sheets and still-high economic growth rates across most of the region provide sufficient flexibility to counter inevitable bumps as the economic cycle turns.

Learning from Asia’s financial crisis in 1997-98, governments in the region have been using macro-prudential policies since before they were considered to be best practice. Hong Kong and Singapore are prime examples of how such measures have been used to curb property price increases. We see scope for several Asian economies to increase borrowing to maximise their growth potential.

In light of this assessment, the current turmoil in the emerging markets should prove transitory for Asia. It does provide a timely opportunity for cleaning up stressed balance sheets in parts of the region, but it also sets the stage for the next phase of more durable and sustainable growth.

The recovery in the US, which has triggered the latest round of soul-searching, combined with Japan’s revival, should be seen as an added bonus, not a detraction, for emerging markets and the wider global economy.

Important disclosures can be found in the Global Research Terms & Conditions