As the tragedy from the Japanese earthquake continues to unfold, a natural assumption is that the severe economic dislocation in the world’s third-largest economy must be having a serious impact on its neighbours.
The truth, though, is that Japan’s suffering is unlikely to be more than a temporary blip on economic growth in most of Asia, which will probably keep growing at 8 per cent or so on average – unless there is a massive nuclear accident that directly affects neighbouring countries.
There are two main reasons for this. The first is that destructive events, even on this scale, do not have a significant impact on economic growth in advanced economies for more than a few months because the initial contraction is followed by a recovery effort that quickly replaces the lost growth.
Steven Wieting, an economist at Citigroup in New York, points out that this effect is clear in the aftermath of a whole range of previous disasters. For example, the nuclear disasters at Three Mile Island in 1979 and Chernobyl in 1986; Japan’s Kobe earthquake in 1995; the Indian Ocean tsunami in 2004 and hurricane Katrina in the US in 2005 share a common feature other than tragedy: none was followed by a recession.
Most economists think the likely outcome of the latest earthquake is that Japan’s economy will contract during the current quarter but then grow faster than it otherwise would have from mid-year. Citigroup says the effect will be to raise growth over the next 12 months by 0.2 percentage points; Moody’s thinks growth may be 0.4 percentage points lower than its previous forecast in 2011, but 0.4 percentage points higher in 2012.
The second reason is that, although it still accounts for about 6 per cent of global GDP, Japan’s economy is simply not as important to the rest of Asia as it used to be. In the 16 years since the Kobe disaster, Japan’s share of exports from other Asian countries has fallen by 40 per cent to 7.3 per cent, according to Citigroup.
The countries with the biggest exposure are Indonesia and the Philippines, which each send more than 15 per cent of their total exports to Japan, according to Nomura. However, both economies are largely domestically driven, with exports to Japan equivalent to less than 4 per cent of gross domestic product.
Thailand, Singapore and Malaysia are a little more vulnerable, with their exports to Japan equivalent to 6-8 per cent of GDP, but all stand to gain significantly as Japan’s reconstruction effort gets under way, which while require it dragging in huge quantities of capital goods and construction materials such as cement, steel and timber. China’s exports to Japan amount to only about 2 per cent of GDP.
Ivailo Izvorski, the World Bank’s lead economist in east Asia, forecast on Monday that any economic impact on the region should be limited one or two quarters. “As reconstruction efforts get under way, there should be a pick-up in economic activity that would boost growth,” he said.
The interruption to Japan’s supplies of nuclear energy will also have a positive impact on some Asian countries. Credit Suisse calculates that Tokyo Electric Power has more than enough unused coal-powered generating capacity to replace the lost nuclear power once the immediate crisis is over and the ports are open.
But generating more power from conventional sources will add significantly to Japan’s current consumption of about 10m tonnes of imported thermal coal a month. Much of this comes from such Asia Pacific supply bases as Indonesia and Australia. Suppliers of natural gas and oil, such as Malaysia and Brunei, would also benefit from Japan’s needs for more energy imports.
Companies in some Asian countries could gain from sales opportunities created by production shortfalls at Japanese competitors. Joanna Chua, an economist at Citigroup in Hong Kong, says South Korea and Taiwan have the most similar export profile to Japan, and probably stand to gain the most.
An example is the potential for Hyundai and Kia, the South Korean carmakers, to benefit from production constraints at Japan’s Toyota, with which they are in direct competition. Alternatively, countries such as Thailand and Indonesia could benefit if Japanese carmakers expand production at local subsidiaries to replace shortfalls at home.
The economic risks for Asia are more uncertain. One would be a nuclear incident that caused widespread disruption in other countries, perhaps as a result of radiation poisoning – or the fear of it.
Another would be serious dislocation of the domestic or exporting economy in countries where manufacturers depend heavily on components sourced from Japan. Taiwan and Thailand are most exposed to this risk, with more than 20 per cent of imports coming from Japan, including significant volumes of electrical and mechanical parts. South Korea, Malaysia, Vietnam and Singapore could also be affected, with between 11 and 15 per cent of imports coming from Japan.
Early signs suggest that there will be dislocation in some industries, although there has been little so far. However most economists think the impact is unlikely to be severe or sustained, in part because Japanese supplies will resume once the recovery efforts begins, and in part because manufacturers will switch sourcing of some components to other countries.
In the financial markets, there are some fears of a wave of portfolio withdrawals by risk-averse foreign investors, or a longer-term slide in Japanese foreign direct investment, which has become particularly important as a means of generating economic growth in south-east Asia.
However, the interest rate differential between Asia and the west is likely to keep short-term investors relatively content, in the absence of a major nuclear disaster. It is too early to forecast the course of future Japanese FDI, but the total seems likely to grow rather than decline as companies seek to reduce production risk by diversifying their manufacturing chain.
Frederic Neumann, co-head of economic research at HSBC in Hong Kong, says the biggest danger is that central bankers react to the turmoil in financial markets by delaying interest rate rises that are needed to head off inflation driven by food prices and loose western monetary policy.
“Japan’s disaster, though incomparably tragic, is unlikely to knock emerging Asia off its current growth trajectory or provide the necessary deflationary impulse to ease rapidly growing price pressures,” says Mr Neumann.
“The temptation among policymakers is now to push back any [monetary policy] tightening already scheduled. But that would be a mistake. Inflation should remain the top concern for central bankers in emerging Asia.”
Source:
The truth, though, is that Japan’s suffering is unlikely to be more than a temporary blip on economic growth in most of Asia, which will probably keep growing at 8 per cent or so on average – unless there is a massive nuclear accident that directly affects neighbouring countries.
There are two main reasons for this. The first is that destructive events, even on this scale, do not have a significant impact on economic growth in advanced economies for more than a few months because the initial contraction is followed by a recovery effort that quickly replaces the lost growth.
Steven Wieting, an economist at Citigroup in New York, points out that this effect is clear in the aftermath of a whole range of previous disasters. For example, the nuclear disasters at Three Mile Island in 1979 and Chernobyl in 1986; Japan’s Kobe earthquake in 1995; the Indian Ocean tsunami in 2004 and hurricane Katrina in the US in 2005 share a common feature other than tragedy: none was followed by a recession.
Most economists think the likely outcome of the latest earthquake is that Japan’s economy will contract during the current quarter but then grow faster than it otherwise would have from mid-year. Citigroup says the effect will be to raise growth over the next 12 months by 0.2 percentage points; Moody’s thinks growth may be 0.4 percentage points lower than its previous forecast in 2011, but 0.4 percentage points higher in 2012.
The second reason is that, although it still accounts for about 6 per cent of global GDP, Japan’s economy is simply not as important to the rest of Asia as it used to be. In the 16 years since the Kobe disaster, Japan’s share of exports from other Asian countries has fallen by 40 per cent to 7.3 per cent, according to Citigroup.
The countries with the biggest exposure are Indonesia and the Philippines, which each send more than 15 per cent of their total exports to Japan, according to Nomura. However, both economies are largely domestically driven, with exports to Japan equivalent to less than 4 per cent of gross domestic product.
Thailand, Singapore and Malaysia are a little more vulnerable, with their exports to Japan equivalent to 6-8 per cent of GDP, but all stand to gain significantly as Japan’s reconstruction effort gets under way, which while require it dragging in huge quantities of capital goods and construction materials such as cement, steel and timber. China’s exports to Japan amount to only about 2 per cent of GDP.
Ivailo Izvorski, the World Bank’s lead economist in east Asia, forecast on Monday that any economic impact on the region should be limited one or two quarters. “As reconstruction efforts get under way, there should be a pick-up in economic activity that would boost growth,” he said.
The interruption to Japan’s supplies of nuclear energy will also have a positive impact on some Asian countries. Credit Suisse calculates that Tokyo Electric Power has more than enough unused coal-powered generating capacity to replace the lost nuclear power once the immediate crisis is over and the ports are open.
But generating more power from conventional sources will add significantly to Japan’s current consumption of about 10m tonnes of imported thermal coal a month. Much of this comes from such Asia Pacific supply bases as Indonesia and Australia. Suppliers of natural gas and oil, such as Malaysia and Brunei, would also benefit from Japan’s needs for more energy imports.
Companies in some Asian countries could gain from sales opportunities created by production shortfalls at Japanese competitors. Joanna Chua, an economist at Citigroup in Hong Kong, says South Korea and Taiwan have the most similar export profile to Japan, and probably stand to gain the most.
An example is the potential for Hyundai and Kia, the South Korean carmakers, to benefit from production constraints at Japan’s Toyota, with which they are in direct competition. Alternatively, countries such as Thailand and Indonesia could benefit if Japanese carmakers expand production at local subsidiaries to replace shortfalls at home.
The economic risks for Asia are more uncertain. One would be a nuclear incident that caused widespread disruption in other countries, perhaps as a result of radiation poisoning – or the fear of it.
Another would be serious dislocation of the domestic or exporting economy in countries where manufacturers depend heavily on components sourced from Japan. Taiwan and Thailand are most exposed to this risk, with more than 20 per cent of imports coming from Japan, including significant volumes of electrical and mechanical parts. South Korea, Malaysia, Vietnam and Singapore could also be affected, with between 11 and 15 per cent of imports coming from Japan.
Early signs suggest that there will be dislocation in some industries, although there has been little so far. However most economists think the impact is unlikely to be severe or sustained, in part because Japanese supplies will resume once the recovery efforts begins, and in part because manufacturers will switch sourcing of some components to other countries.
In the financial markets, there are some fears of a wave of portfolio withdrawals by risk-averse foreign investors, or a longer-term slide in Japanese foreign direct investment, which has become particularly important as a means of generating economic growth in south-east Asia.
However, the interest rate differential between Asia and the west is likely to keep short-term investors relatively content, in the absence of a major nuclear disaster. It is too early to forecast the course of future Japanese FDI, but the total seems likely to grow rather than decline as companies seek to reduce production risk by diversifying their manufacturing chain.
Frederic Neumann, co-head of economic research at HSBC in Hong Kong, says the biggest danger is that central bankers react to the turmoil in financial markets by delaying interest rate rises that are needed to head off inflation driven by food prices and loose western monetary policy.
“Japan’s disaster, though incomparably tragic, is unlikely to knock emerging Asia off its current growth trajectory or provide the necessary deflationary impulse to ease rapidly growing price pressures,” says Mr Neumann.
“The temptation among policymakers is now to push back any [monetary policy] tightening already scheduled. But that would be a mistake. Inflation should remain the top concern for central bankers in emerging Asia.”
Source:
No comments:
Post a Comment