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Economic Outlooks — Asia Pacific Economic Outlook, May 2013

Economic Outlooks — Asia Pacific Economic Outlook, May 2013

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Published by: Deloitte University Press on May 23, 2013
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Asia PacifcEconomicOutlook
May 2013
The growth picture
China’s government reported that, in the rstquarter o 2013, real GDP was up 7.7 percent roma year earlier. Tis was slower than expected andslower than the 7.9 percent growth recorded inthe ourth quarter o 2012. Tis is the rst time in20 years that growth has been less than 8.0 percentor our consecutive quarters. Growth o xed-asset investment, while strong at 20.6 percent, wasworse than the market expected. China is clearly becoming a more mature economy with growththat is more consistent with middle-incomeauence. So while many people will long or theblistering 10–12 percent growth o the past, it isentirely normal that China would shi to a lowerrate o growth, especially as labor orce growthhas basically ceased. Tus the rapid growth thatwas needed to absorb new entrants into the labororce is no longer an issue. Te government isprojecting growth o 7.5 percent going orward.Te real question is whether even this level canbe sustained given the severe imbalances in theChinese economy.In addition, there is the question as to whetherthe growth will continue to come rom govern-ment-nanced investments in inrastructure, orrom domestic demand—principally consumerdemand—that is needed or a sustainable growthpath. It is not clear at this point i China is goingto make that transition anytime soon. In any event, nancial markets were disappointed withthe Chinese gures, especially as growth came inlower than the market had predicted. Indeed themarket was hoping or acceleration in growth.Equity markets across Asia declined on this news.Going into the second quarter, there are signso weakness:In April, industrial production was up 9.3 per-cent rom a year earlier, and retail sales were
By Dr. Ira Kalish
Aa Pacfc Economc Oook—Ma 2013
up 12.8 percent over a year ago—both guresrepresent a slowdown in growth.Te government reported that its purchasingmanager’s index (PMI) or services ell rom55.6 in March to 54.5 in April. Tis indicatescontinued moderate growth o services, but ata slower pace.Te government reported that the PMI ormanuacturing dropped rom 50.9 in Marchto 50.6 in April—just barely above the criti-cal 50.0 level, below which output declines.In addition, an index o new orders in China’smanuacturing sector ell rom 52.3 in Marchto 51.7 in April. Tese reports mean that themanuacturing sector is barely growing.Te government reports that, in April, con-sumer prices were up 2.4 percent over a yearago. Tis is well below the government’s targeto 3.5 percent ination. In addition, wholesaleprices ell 2.6 percent in April versus a yearago. Tis is likely due to declining commodity prices as well as excess capacity at actories.Te divergence o wholesale and retail priceswill boost the prot margins o retailers.Declining wholesale prices are likely to lead tolower consumer-price ination in the comingmonths. Lower ination will give the govern-ment leeway in deregulating the prices o resources and utilities. Such price controls leadto inecient use o resources, which in turnrestrain productivity growth and contributeto pollution.Te slowdown in economic activity, o course,is partly due to policies implemented by the new regime. Te efort to scale back borrowing by local governments is having a dampening impacton xed-asset investment—much o which isnanced by local governments. Te anti-cor-ruption campaign, including discouraging theentertaining o government ocials, appears to besuppressing retail sales.Te question now is what the government doesnext. Although ination is modest, the centralbank may not want to ease policy urther lest itencourage excessive borrowing or more property price increases. Tere is concern that, given theexcessive growth o credit and a property pricebubble, the government may not have the exibil-ity necessary to stimulate the economy.An easing o monetary policy and the openingo new sources o credit would only exacerbatethe credit market problems. More scal stimuluswould boost the parts o the economy that arealready growing rapidly, such as investment ininrastructure, but it would do little to assist theeconomy in shiing toward more sustainableorms o growth, such as consumer spending. Yetthe government may decide to engage in moreinvestment-driven stimulus. In other words,China appears constrained in its ability to under-take reorms that are necessary or long-termstructural adjustments and sustainability.
China is clearly becoming a more matureeconomy with growth that is more consistent withmiddle-income auence.
Aa Pacfc Economc Oook—Ma 2013

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