Asia’s Year of the Rooster saw some mixed economic performances across the region. Amid an improving global economy, Pacific Money takes a look at some potential New Year 2018 resolutions for the region’s biggest economies, in hope of further improvement in the Year of the Dog.
China: Less is More
China’s economy is expected to exceed the official growth target for 2017, clocking up an estimated expansion of 6.9 percent on the back of strong government infrastructure spending, an improved property market and export growth.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
Yet while Beijing is expected to maintain a 6.5 percent GDP growth target for 2018, Capital Economics suggests the real figure will drop below a still sprightly 5 percent. With China’s debt to GDP level estimated at 260 percent at the end of 2016 and potentially hitting 320 percent by 2021, the authorities have been urged to rein in excessive lending or face the real risk of a financial crisis.
Following the United States’ lead, China’s central bank has already hiked interest rates and more tightening could further dampen growth in the world’s second-largest economy.
Prospects: China bears have warned of a debt-driven bust before, but Beijing keeps hitting its stated growth targets. With even President Xi Jinping now vowing to curb industrial overcapacity and high debt levels, the communist-ruled giant could yet ride out the promised “Great Deleveraging.” More reforms and less borrowing would help, however.
Japan: Stay on Target
Like Luke Skywalker attacking the Death Star, Japan’s central bank and government need to desperately stay on target as they seek to wipe out the last vestiges of the key enemy, deflation.
Despite the nation’s second-longest economic recovery since World War II, inflation remains less than half the Bank of Japan’s 2 percent target, although the GDP deflator did climb into positive territory last year for the first time in a quarter century.
With Japanese Prime Minister Shinzo Abe pushing corporations to pay higher wages out of their 200 trillion yen ($18 billion) cash pile, the pressure is on for businesses and this year’s likely new central bank governor to join in the attack.
Already Japan’s third-longest serving leader in the postwar period, Abe can ensure a lasting legacy if he can further cement his “Abenomics” reforms, including through realizing the Trans-Pacific Partnership (now rebranded as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership).
Prospects: A soaring stock market, record-low jobless rate, and rising corporate profits point to further expansion ahead for the world’s third-largest economy. However, on the horizon is another consumption tax hike slated for October 2019, with previous increases having tipped the economy into recession. Abe will have to get the economy moving faster than expected to prevent another such downturn.
India: More of the Same, Please
Indian Prime Minister Narendra Modi has delivered on his reform promises, pushing through a new goods and services tax, an individual identification system that has opened up access for millions to the financial system, and demonetization that has attacked corruption.
The reforms have been applauded by investors, with the benchmark Sensex index rising by nearly 29 percent in the year to January 3, while India-related mutual funds have poured in around $48 billion in the first 11 months of 2017.
Businesses have also welcomed India’s surging up the World Bank’s “ease of doing business” rankings to 100th, having enacted a record eight pro-business reforms in the past year.
However, demonetization has slowed what was the world’s fastest growing major economy, while high debt levels among both government and corporations have dampened investment spending. With only half the population having access to basic sanitation, Modi’s government still has plenty of work to improve living conditions for the nation of 1.3 billion people.
Prospects: Recent state election victories for Modi’s Bharatiya Janata Party point to an extended term in office for Modi. He will need the extra time to help bed down the latest reforms and turn around recent GDP data, which was described by ANZ Research as “unimpressive.” Nevertheless, analysts at BMI Research still see India as Asia’s brightest economic star for the decade ahead.
South Korea: Mind that Bucket
Winston Churchill warned that a nation cannot “tax itself into prosperity…[it’s] like a man standing in a bucket and trying to lift himself up by the handle.” However, contrasting with recent U.S. tax cuts, South Korean President Moon Jae-in’s administration has pushed through hikes to corporate and individual income taxes, while seeking to create more government jobs as part of its wealth redistribution efforts.
Businesses have also raised the alarm over moves to hike the minimum wage to 10,000 won ($9.39) an hour by 2020, up 55 percent from the 2017 level of 6,470 won, as well as measures forcing firms to hire more full-time workers.
A housing boom has also resulted in record household debt, which increased at the second-fastest rate in the world in the first half of 2017 to around 94 percent of GDP, according to the Bank for International Settlements.
However, thus far Asia’s fourth-largest economy has shrugged off its shackles, with GDP growth seen remaining above 3 percent in 2018 on the back of improved exports and increased government spending, including on the PyeongChang Winter Olympics. South Korea’s finance ministry sees per capita income reaching $32,000 by the end of 2018, putting it above the $30,000 threshold seen as an indicator of a developed economy.
Prospects: Moon’s administration will need more than its fair share of luck to achieve its economic targets, with the tax hikes set to dampen growth along with structural headwinds including unfavorable demographics and its heavy export reliance via the chaebol conglomerates. The prospects of dampening trade with both China and the United States will not aid exports, while Japan ties have also chilled over the “comfort women” issue. A dose of economic “Moonshine” could be urgently required if an improving world economy does not come to the rescue.
Australia: Don’t Count on Luck
Australia’s world-beating economic winning streak has now stretched to 26 straight years, and looks likely to extend further in 2018 barring an external shock.
Yet a housing boom in Australia’s major cities of Sydney and Melbourne has left the “Lucky Country” with record household debt and weak household spending, amid soft wages growth. Even worse, the housing boom has now been declared finished after prices cooled in the last two months, further dampening growth prospects.
With the promised switch from mining to non-mining investment slow to materalize, Australian Prime Minister Malcolm Turnbull will be hoping conditions improve before his center-right government heads to the polls, likely in 2018.
In the meantime, the central bank is likely to keep official interest rates at a record low of 1.5 percent amid soft inflation, while the government ponders whether it can afford both corporate and income tax cuts as an election sweetener to voters.
Prospects: Barring a major slowdown in China, the nation’s major trading partner, or a drastic cooling of the housing market, Australia is likely to muddle through with around 2 to 3 percent GDP growth in 2018. Critics argue that more reform is essential to ensure the Lucky Country stays lucky, but with only a single-seat majority in the lower house Turnbull has other priorities.